Endogenous Enforcement Institutions
Better legal institutions favor economic development, but only in States withsufficiently constrained executive power. We document this novel pattern acrossdeveloping countries, and build a simple model that illustrates how power, and theinstitutions that constrain or complement it, may affect development. We show that thereis a tradeoff between the two facets of power—enforcement and expropriation. As aruler’s power grows, his temptation not to enforce diminishes while the temptation toexpropriate grows. As a consequence, private enforcement optimally evolves into Stateenforcement, and legal institutions, which relax the ruler’s incentive constraint onenforcement, lose economic importance vis-à-vis political institutions, which limit theexecutive’s ability to expropriate. Our results are consistent with the observed crosscountrypatterns, as well as with historical evidence on the transition from the “LawMerchant” private enforcement system to the State.
|Date of creation:||Oct 2015|
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