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Institutional trap

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Author Info

  • Quy-Toan Do

Abstract

The author studies the persistence of inequality and inefficient governance in a physical capital accumulation model with perfect information, missing credit markets, and endogenous barriers to entry. When access to investment opportunities is regulated, rent-seeking entrepreneurs form coalitions of potentially varying size to bribe a regulator to restrict entry. Small coalitions run short of resources, while large coalitions suffer more severe free-rider problems. The distribution of wealth thus determines the equilibrium coalition structure of the economy and consequently the level of regulatory capture. A dynamic analysis supports the persistence of inefficiencies in the long run. Initial conditions determine whether the economy converges to a steady state characterized by efficient governance and low levels of inequality, or a path toward an institutional trap where regulatory capture and wealth inequality reinforce each other.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3291.

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Date of creation: 01 Apr 2004
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Handle: RePEc:wbk:wbrwps:3291

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Related research

Keywords: Roads&Highways; Information Technology; Health Monitoring&Evaluation; Gender and Health; Early Child and Children's Health;

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Cited by:
  1. Francisco H. G. Ferreira & Filipe Campante, 2004. "Inefficient lobbying, populism and oligarchy," Textos para discussão 483, Department of Economics PUC-Rio (Brazil).
  2. Douhan, Robin & Henrekson, Magnus, 2007. "The Political Economy of Entrepreneurship," Working Paper Series 716, Research Institute of Industrial Economics.
  3. Congdon Fors, Heather & Olsson, Ola, 2005. "Endogenous Institutional Change After Independence," Working Papers in Economics 163, University of Gothenburg, Department of Economics.
  4. Raghuram G. Rajan & Rodney Ramcharan, 2011. "Constituencies and Legislation: The Fight over the McFadden Act of 1927," NBER Working Papers 17266, National Bureau of Economic Research, Inc.
  5. Douhan, Robin & Henrekson, Magnus, 2008. "Productive and Destructive Entrepreneurship in a Political Economy Framework," Working Paper Series 761, Research Institute of Industrial Economics.
  6. Thai, Mai Thi Thanh & Turkina, Ekaterina, 2014. "Macro-level determinants of formal entrepreneurship versus informal entrepreneurship," Journal of Business Venturing, Elsevier, vol. 29(4), pages 490-510.

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