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Private Incentives versus Class Interests: A Theory of Optimal Institutions with An Application to Growth

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  • Ani Guerdjikova

    (Cornell University)

  • Levon Barseghyan

    (Cornell University)

Abstract

We build a dynamic political economy model with a two-class society: workers and the elite. A key feature of the model is that the formation of the elite, the rate of innovation, taxes and public spending are endogenous. Differently from most of the literature on institutions and growth which emphasizes the conflict between different classes, we focus on the tension between private incentives of the members of the elite and their class interests. Our model explains the observed differences in colonization strategies by showing how the optimal choice of institutions depends on the initial conditions faced by colonizing powers. The model also creates a mapping between institutions and economic outcomes which is consistent with the observed differences in the patterns of economic growth.

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Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 939.

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Date of creation: 2008
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Handle: RePEc:red:sed008:939

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  1. Roger Lagunoff & William Jack, 2004. "Dynamic Enfranchisement," 2004 Meeting Papers, Society for Economic Dynamics 466, Society for Economic Dynamics.
  2. Naomi R. Lamoreaux & Kenneth L. Sokoloff, 2005. "The Decline of the Independent Inventor: A Schumpterian Story?," NBER Working Papers 11654, National Bureau of Economic Research, Inc.
  3. Oded Galor & Joseph Zeira, 2013. "Income Distribution and Macroeconomics," Working Papers, Brown University, Department of Economics 2013-12, Brown University, Department of Economics.
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