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The poor, the rich and the enforcer: institutional choice and growth

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  • Thorsten Koeppl
  • Cyril Monnet
  • Erwan Quintin

Abstract

We study economies where improving the quality of institutions ? modeled as improving contract enforcement ? requires resources, but enables trade that raises output by reducing the dispersion of marginal products of capital. We find that in this type of environment it is optimal to combine institutional building with endowment redistribution, and that more ex-ante dispersion in marginal products increases the incentives to invest in enforcement. In addition, we show that institutional investments lead over time to a progressive reduction in inequality. Finally, the framework we describe enables us to formalize the hypothesis formulated by Engerman and Sokoloff (2002) that the initial concentration of human and physical capital can explain the divergence of different countries? institutional history.

Suggested Citation

  • Thorsten Koeppl & Cyril Monnet & Erwan Quintin, 2008. "The poor, the rich and the enforcer: institutional choice and growth," Working Papers 0801, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddwp:0801
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    More about this item

    Keywords

    Human capital; Macroeconomics;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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