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Efficient institutions

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  • Thorsten Koeppl
  • Cyril Monnet
  • Erwan Quintin

Abstract

Are efficiency considerations important for understanding differences in the development of institutions? The authors model institutional quality as the degree to which obligations associated with exchanging capital can be enforced. Establishing a positive level of enforcement requires an aggregate investment of capital that is no longer available for production. When capital endowments are more unequally distributed, the bigger dispersion in marginal products makes it optimal to invest more resources in enforcement. The optimal allocation of the institutional cost across agents is not monotonic and entails a redistribution of endowments before production begins. Investing in enforcement benefits primarily agents at the bottom of the endowment distribution and leads to a reduction in consumption and income inequality. Efficiency, redistribution and the quality of institutions are thus intricately linked and should be studied jointly.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 08-33.

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Date of creation: 2008
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Handle: RePEc:fip:fedpwp:08-33

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Keywords: Human capital ; Capital;

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Cited by:
  1. Jonathan Pogach, 2010. "Efficient Auditing and Enforcement in Dynamic Contracts," 2010 Meeting Papers, Society for Economic Dynamics 572, Society for Economic Dynamics.

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