Iranian Journal of Economic Research

An Institutional–Behavioral Approach to Economic Policymaking and Its Implications for Iran

Document Type : Research Paper

Authors

Ali Nikoonesbati 1
Abbas Assari Arani 2
Farshad Momeni 3
Lotfali Agheli 4

1 Ph.D. Candidate in Economics, Faculty of Management and Economics, Tarbiat Modares University, Tehran, Iran

2 Associate Professor, Faculty of Management and Economics, Tarbiat Modares University,Tehran, Iran

3 Professor of Economics, Department of Economics, Allameh Tabataba’i University, Tehran,Iran

4 Associate Professor, Faculty of Management and Economics, Tarbiat Modares University, Tehran, Iran

https://doi.org/10.22054/ijer.2025.83282.1330
Abstract
The increasing complexity of policymaking in today’s rapidly evolving world has underscored the need for hybrid analytical models to better explain the determinants of policy success and failure. Existing research suggests that both institutional and behavioral approaches have limitations in adequately accounting for policy failure. The institutional approach, for example, does not sufficiently explain policy errors that occur within democratic systems, while the behavioral approach cannot fully account for the persistence of ineffective policies and the lack of reform despite the use of behavioral interventions such as nudges. To address these shortcomings, the current study proposed an institutional–behavioral model of policymaking that integrates insights from both approaches. The proposed framework emphasizes the interplay among institutions, heuristics, and institutional structures in shaping the success or failure of policymaking. Using a comparative analytical approach, this study examined indicators and policies in Iran’s housing and healthcare sectors. According to the results, the share of housing and healthcare expenditures in total urban household spending in Iran is nearly twice the global average, indicating significant policy failure. This failure can be attributed, first, to the mismatch between the country’s institutional structure and the requirements of a democratic governance system, which undermines the quality of policymaking. Second, policymakers exhibit cognitive biases, particularly the availability heuristic, in both the housing and healthcare sectors. Specifically, they tend to assume that using public resources and increasing supply alone will improve outcomes. In doing so, they overlook the critical role of sector-specific institutions—including the legal and regulatory framework—which substantially contributes to the failure of policies.
Introduction
Evidence from many countries indicates that policymakers often struggle to achieve their intended policy objectives. Although sustained economic growth is a universal policy goal, many middle-income countries have remained trapped at the same income level for decades, with some even experiencing economic decline. Similar concerns have been raised about the effectiveness of policymaking in Iran, where the limited success of public policies has led some observers to question their overall effectiveness. Numerous theoretical frameworks have been developed to explain why policymaking fails. One prominent perspective is the public choice model, which is rooted in neoclassical economic theory. Another is the policy cycle model, which conceptualizes policymaking as a sequence of stages from agenda-setting to evaluation. Despite their contributions, these approaches have been criticized for their limited ability to capture the complexity of real-world policymaking. As a result, hybrid frameworks that integrate insights from multiple theoretical traditions have gained increasing attention. Against this background, the current study aimed to propose an institutional–behavioral model and apply it to explain policymaking in Iran.
Materials and Methods
The present study employed a comparative analysis methodology. Comparative analysis is a systematic approach to identifying causal relationships by examining the similarities and differences among social phenomena. It is particularly well suited to investigating complex policy issues in which multiple institutional and behavioral factors interact. Owing to its ability to generate robust causal inferences, this methodology has been widely applied by the proponents of the institutionalist approach.
Results and Discussion
According to the institutional perspective, effective policymaking is most likely to emerge in participatory or democratic political systems, where competition among ideas, accountability, and inclusivity improve the quality of policy decisions. From this viewpoint, improving policymaking requires reforming the underlying incentive structure and strengthening participatory or democratic institutions. However, democratic systems are not immune to policy failure as they can deteriorate because of the actions of political leaders and citizens, as demonstrated by historical episodes of democratic collapse. Moreover, even well-functioning democracies may adopt ineffective policies when decision-makers rely on heuristics and cognitive biases, a phenomenon highlighted during the COVID–19 pandemic.
Behavioral economics focuses on the cognitive processes that shape individual decision-making. It argues that because information processing is both costly and constrained by the limited cognitive capacity of the human mind, individuals rely on heuristics, or mental rules of thumb, when making decisions. Within this perspective, nudges are among the most widely advocated strategies for improving policymaking. However, nudges are not universally effective. Individuals may have heterogeneous or conflicting preferences, or some actors may employ counter-nudges to attract public attention or offset behavioral interventions. Even decision-makers may pursue actions that serve their own interests rather than the public good. Therefore, the hybrid model presented in Figure 1 can help to better explain the issues.
Figure 1. Factors Affecting Policy Outcomes

Resource: Research Results
The proposed model was applied to examine policymaking in Iran’s housing and healthcare sectors. The analysis revealed several findings. First, Iran’s institutional structure differs substantially from a democratic system, which adversely affects the quality of policymaking. Second, despite having a lower household-to-housing-unit ratio than countries such as the United Kingdom, Canada, and South Korea, Iranian households devote a significantly larger share of their expenditures to housing. This suggests that policymakers have focused primarily on increasing housing supply while giving insufficient attention to complementary policies, such as rent regulation, social housing, and long-term mortgage financing. Third, healthcare expenditures account for a substantially larger share of urban household spending in Iran than in many advanced economies. The share of healthcare expenditure in total urban household expenditure in Iran was 9.1% in 2013, increasing to 10.7% in 2017 before declining to 8.7% in 2024 (Statistical Center of Iran). By comparison, the corresponding share across OECD countries was 3.3% in 2017, while it was below 3% in countries such as the United Kingdom, France, Germany, and the United States (OECD, 2019). One of the main factors contributing to this disparity is the limited attention paid by Iranian policymakers to controlling induced demand in the healthcare sector.
Conclusion
The present study proposed a hybrid institutional–behavioral model to explain the determinants of policy success and failure. By integrating institutional and behavioral perspectives, the model highlights the roles of institutions, heuristics, and the broader institutional structure in shaping policy outcomes, thereby enhancing the explanatory power of the model. Using a comparative analytical approach, the study applied the model to the housing and healthcare sectors in Iran. The findings showed that the shares of housing and healthcare expenditures in total urban household spending are substantially higher in Iran than in comparable countries, indicating significant policy failure.
From the perspective of the proposed institutional–behavioral model, one of the principal causes of this failure is the mismatch between Iran’s institutional structure and the characteristics of a democratic system. This institutional gap limits the competition of ideas and hinders the adoption of policy innovations that have proven effective in other countries. The analysis also identified the influence of the availability heuristic in both the housing and healthcare sectors. Policymakers tend to assume that using public resources and increasing supply are sufficient to improve outcomes, while giving insufficient attention to the institutional and regulatory arrangements that govern each sector.


Keywords

Policymaking, Institutional&ndash
behavioral Approach, Iranian Economy, Housing, Health
Subjects
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  • Receive Date 10 December 2024
  • Revise Date 31 October 2025
  • Accept Date 14 July 2025
  • First Publish Date 03 November 2025

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