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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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  1. Daron Acemoglu & Simon Johnson, 2005. "Unbundling Institutions," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 949-995, October.
  2. Acemoglu, Daron & Golosov, Mikhail & Tsyvinski, Aleh, 2008. "Markets versus governments," Journal of Monetary Economics, Elsevier, vol. 55(1), pages 159-189, January.
  3. Thorsten Koeppl, 2005. "Optimal Dynamic Risk Sharing when Enforcement is a Decision Variable," Working Papers 1050, Queen's University, Department of Economics.
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  10. Stanley L Engerman & Kenneth L. Sokoloff, 2002. "Factor Endowments, Inequality, and Paths of Development Among New World Economics," NBER Working Papers 9259, National Bureau of Economic Research, Inc.
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  13. Narayana Kocherlakota, 2004. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Levine's Bibliography 122247000000000729, UCLA Department of Economics.
  14. Easterly, William, 2007. "Inequality does cause underdevelopment: Insights from a new instrument," Journal of Development Economics, Elsevier, vol. 84(2), pages 755-776, November.
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