Contracting Institutions and Economic Growth
AbstractThis paper studies the effects of contracting institutions on economic development. A growth model is presented with endogenous incomplete markets, where financial frictions generated by the imperfect enforcement of contracts depend on the future growth of the economy, which determines the costs of being excluded from financial markets after defaulting. As the economy approaches its balanced growth path, frictions and their effect on income become more important because the net benefits of honoring contracts decrease. Therefore, as the economy approaches its steady state, the effect of contracting institutions on GDP per capita increases. This effect is due not only to a slower accumulation of capital, but also to a misallocation of resources toward labor-intensive productive sectors, where self-enforcing incentives are stronger. To validate the model empirically, the paper modifies previous specifications of cross-country regressions to estimate the effect of contracting institutions on per capita GDP. In line with the main predictions of the model, the econometric evidence shows that this effect is larger in economies that were relatively close to their steady states in 1950. Unlike contracting institutions, the evidence shows that property-rights institutions, included in an extension to the model, have an effect on income per capita throughout the development process.
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Bibliographic InfoPaper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 643.
Date of creation: Sep 2011
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-07 (All new papers)
- NEP-DEV-2011-11-07 (Development)
- NEP-DGE-2011-11-07 (Dynamic General Equilibrium)
- NEP-FDG-2011-11-07 (Financial Development & Growth)
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- Alessandra Bonfiglioli & Gino Gancia, 2011.
"Growth, Selection and Appropriate Contracts,"
UFAE and IAE Working Papers
876.11, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC), revised 05 Oct 2012.
- Alessandra Bonfiglioli & Gino Gancia, 2009. "Growth, selection and appropriate contracts," Economics Working Papers 1345, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2012.
- Bonfiglioli, Alessandra & Gancia, Gino A, 2011. "Growth, Selection and Appropriate Contracts," CEPR Discussion Papers 8462, C.E.P.R. Discussion Papers.
- Alessandra Bonfiglioli and Gino Gancia, 2012. "Growth, Selection and Appropriate Contracts," Working Papers 566, Barcelona Graduate School of Economics.
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