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A Simple Model of Inefficient Institutions

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  • Daron Acemoglu

Abstract

This paper develops a simple model of economic and political institutions that lead to poor aggregate economic performance. In the model economy, groups with political power, the elite, choose policies to increase their income and to directly or indirectly transfer resources from the rest of society to themselves. The resulting equilibrium is generally inefficient because of three distinct mechanisms: (1) revenue extraction, (2) factor price manipulation and (3) political consolidation. In particular, the elite may pursue inefficient policies to extract revenue from other groups. They may do so to reduce the demand for factors coming from other groups in the economy, thus indirectly benefiting from changes in factor prices. Finally, they may try to impoverish other groups competing for political power. The elite's preferences over inefficient policies translate into inefficient economic institutions. The notable exception to this general picture emerges when long‐term investments are important, thus creating a commitment (holdup) problem, whereby equilibrium taxes and regulations are worse than the elite would like them to be from an ex ante point of view. In this case, economic institutions that provide additional security of property rights to other groups can be useful.

Suggested Citation

  • Daron Acemoglu, 2006. "A Simple Model of Inefficient Institutions," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(4), pages 515-546, December.
  • Handle: RePEc:bla:scandj:v:108:y:2006:i:4:p:515-546
    DOI: 10.1111/j.1467-9442.2006.00460.x
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    1. Acemoglu,Daron & Robinson,James A., 2009. "Economic Origins of Dictatorship and Democracy," Cambridge Books, Cambridge University Press, number 9780521671422, December.
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