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The poor, the rich and the enforcer: institutional choice and growth

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  • Erwan Quintin
  • Thorsten Koeppl
  • Cyril Monnet

Abstract

We study economies where improving the quality of institutions – modeled as improving contract enforcement – requires resources, but enables trade that raises output by reducing the dispersion of marginal products of capital. We find that in this type of environment it is optimal to combine institutional building with endowment redistribution, and that more ex-ante dispersion in marginal products increases the incentives to invest in enforcement. In addition, we show that institutional investments lead over time to a progressive reduction in inequality. Finally, the framework we describe enables us to formalize the hypothesis formulated by Engerman and Sokoloff (2002) that the initial concentration of human and physical capital can explain the divergence of different countries’ institutional history.

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Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 0801.

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Date of creation: 2008
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Handle: RePEc:fip:feddwp:0801

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Keywords: Human capital ; Macroeconomics;

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  2. Dan Bernhardt & Huw Lloyd-Ellis, 1993. "Enterprise, Inequality and Economic Development," Working Papers, Queen's University, Department of Economics 893, Queen's University, Department of Economics.
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  12. Thorsten Koeppl, 2005. "Optimal Dynamic Risk Sharing when Enforcement is a Decision Variable," Working Papers, Queen's University, Department of Economics 1050, Queen's University, Department of Economics.
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