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The Impact of Simple Institutions in Experimental Economies with Poverty Traps

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  • C. Monica Capra
  • Tomomi Tanaka
  • Colin Camerer
  • Lauren Munyan
  • Veronica Sovero
  • Lisa Wang
  • Charles Noussair

Abstract

The existence of multiple equilibria is one explanation for why some countries are rich while others are poor. This explanation also allows the possibility that changes in political and economic institutions might help poor countries "jump" from a bad economic equilibrium into a better one, permanently increasing their output and income. Experiments can be used to study complex processes like the effect of institutions on economic growth. The control that experiments afford allows structural parameters to be changed, policies to be added and subtracted, and economic outcomes to be precisely measured. In this paper, we study a simple experimental economy in which agents produce output in each period, and can allocate the output between consumption and investment (the experiment builds on the design of Lei and Noussair, 2002, 2003). Capital productivity is higher if total investment is above a threshold. Because of the threshold externality, there are two equilibria - a suboptimal "poverty trap" and an optimal "rich country" equilibrium - which differ by a factor of approximately three in the agent income they create. In baseline sessions, in which agents make independent decisions in a decentralized economy, the economies typically sink into the poverty trap and the optimal equilibrium is never reached. However, the ability to communicate before investing, or to vote on binding "industrial policy" proposals, improves average earnings. Combining both of these simple institutions enables all of the economies to escape the poverty trap. This experimental environment constitutes a platform onto which many more complex features can be added.

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Paper provided by Department of Economics, Emory University (Atlanta) in its series Emory Economics with number 0508.

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Date of creation: Feb 2005
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Handle: RePEc:emo:wp2003:0508

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Cited by:
  1. John Duffy, 2008. "Macroeconomics: A Survey of Laboratory Research," Working Papers 334, University of Pittsburgh, Department of Economics, revised Mar 2008.
  2. Im, Fernando Gabriel & Rosenblatt, David, 2013. "Middle-income traps : a conceptual and empirical survey," Policy Research Working Paper Series 6594, The World Bank.
  3. C. Monica Capra & Tomomi Tanaka, 2006. "Communication and the Extraction of Natural Renewable Resources with Threshold Externalities," Emory Economics 0602, Department of Economics, Emory University (Atlanta).
  4. Ernst Fehr & Jean-Robert Tyran, 2004. "Money Illusion and Coordination Failure," CESifo Working Paper Series 1141, CESifo Group Munich.
  5. Lybbert, Travis J. & Galarza, Francisco B. & McPeak, John G. & Barrett, Christopher B. & Boucher, Stephen R. & Carter, Michael R. & Chantarat, Sommarat & Fadlaoui, Aziz & Mude, Andrew G., 2010. "Dynamic Field Experiments in Development Economics: Risk Valuation in Morocco, Kenya, and Peru," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 39(2), April.
  6. Jordi Brandts & David J. Cooper, 2005. "It's What You Say Not What You Pay. An Experimental Study of Manager-Employee Relationship in Overcoming Coordination Failure," Working Papers 162, Barcelona Graduate School of Economics.
  7. Bernard, Mark & Dreber, Anna & Strimling, Pontus & Eriksson, Kimmo, 2013. "The subgroup problem: When can binding voting on extractions from a common pool resource overcome the tragedy of the commons?," Journal of Economic Behavior & Organization, Elsevier, vol. 91(C), pages 122-130.
  8. Juan Camilo C�rdenas, 2009. "Experiments in Environment and Development," Annual Review of Resource Economics, Annual Reviews, vol. 1(1), pages 157-182, 09.
  9. Jordi Brandts & David J. Cooper, 2004. "Observability and Overcoming Coordination Failure in Organizations. An Experimental Study," Working Papers 143, Barcelona Graduate School of Economics.
  10. David Cooper, 2006. "Are experienced managers experts at overcoming coordination failure?," Artefactual Field Experiments 00037, The Field Experiments Website.
  11. Jordi Brandts & David J. Cooper, 2005. "It's What You Say Not What You Pay," UFAE and IAE Working Papers 643.05, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  12. Ferruccio Ponzano & Roberto Ricciuti, 2012. "An Experimental AK Model of Growth," CESifo Working Paper Series 3744, CESifo Group Munich.

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