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Modeling Inefficient Institutions

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  • Daron Acemoglu

Abstract

Why do inefficient %uF818 non-growth enhancing %uF818 institutions emerge and persist? This paper develops a simple framework to provide some answers to this question. Political institutions determine the allocation of political power, and economic institutions determine the framework for policy-making and place constraints on various policies. 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 baseline model encompasses various distinct sources of inefficient policies, including revenue extraction, factor price manipulation and political consolidation. Namely, the elite may pursue inefficient policies to extract revenue from other groups, to reduce their demand for factors, thus indirectly benefiting from changes in factor prices, and to impoverish other groups competing for political power. The elite%u2019s preference over inefficient policies translates into inefficient economic institutions. Institutions that can restrict inefficient policies will in general not emerge, and the elite may manipulate economic institutions in order to further increase their income or facilitate rent extraction. The exception is when there are commitment (holdup) problems, so that 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. The paper concludes by providing a framework for the analysis of institutional change and institutional persistence.

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  • Daron Acemoglu, 2006. "Modeling Inefficient Institutions," NBER Working Papers 11940, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11940
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    Cited by:

    1. Fergusson, Leopoldo, 2013. "The political economy of rural property rights and the persistence of the dual economy," Journal of Development Economics, Elsevier, vol. 103(C), pages 167-181.
    2. Timothy Besley & Torsten Persson, 2010. "State Capacity, Conflict, and Development," Econometrica, Econometric Society, vol. 78(1), pages 1-34, January.
    3. Alberto Chong & Mark Gradstein, 2006. "Redistributional Preferences and Imposed Institutions," Research Department Publications 4482, Inter-American Development Bank, Research Department.
    4. Timothy Besley & Torsten Persson, 2009. "The Origins of State Capacity: Property Rights, Taxation, and Politics," American Economic Review, American Economic Association, vol. 99(4), pages 1218-1244, September.
    5. Thomas Farole & Andres Rodriguez-Pose & Michael Storper, 2007. "Social capital, rules, and institutions: A cross-country investigation," Sciences Po publications 2007-12, Sciences Po.
    6. Dorsch, Michael T. & Dunz, Karl & Maarek, Paul, 2016. "Development and inefficient regulation under the threat of revolution," Journal of Comparative Economics, Elsevier, vol. 44(4), pages 1040-1054.
    7. Braunfels, Elias, 2016. "Further Unbundling Institutions," Discussion Paper Series in Economics 13/2016, Norwegian School of Economics, Department of Economics.
    8. Juan Carlos Cordoba & Genevieve Verdier, 2005. "Lucas vs. Lucas: On Inequality and Growth," Macroeconomics 0511021, EconWPA.
    9. Verdier, Thierry, 2010. "Ouverture, conflits et capacité étatique : une perspective d’économie politique," L'Actualité Economique, Société Canadienne de Science Economique, vol. 86(4), pages 415-449, décembre.
    10. Besley, Timothy & Kudamatsu, Masayuki, 2007. "Making autocracy work," LSE Research Online Documents on Economics 3764, London School of Economics and Political Science, LSE Library.
    11. Daron Acemoglu & Michael Golosov & Aleh Tsyvinski, 2006. "Markets Versus Governments: Political Economy of Mechanisms," NBER Working Papers 12224, National Bureau of Economic Research, Inc.
    12. Werner Pascha & Cornelia Storz & Markus Taube, 2011. "Coordination between Inertia and Dynamic Development: An Overview of Issues and Contributions," Chapters,in: Institutional Variety in East Asia, chapter 1 Edward Elgar Publishing.
    13. Matteo Cervellati & Piergiuseppe Fortunato & Uwe Sunde, 2008. "Hobbes to Rousseau: Inequality, Institutions and Development," Economic Journal, Royal Economic Society, vol. 118(531), pages 1354-1384, August.
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    15. Donato De Rosa, 2006. "Explaining Russian manufacturing exports: Firm characteristics and external conditions," Working Papers halshs-00590449, HAL.
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    17. Aparicio, Sebastian & Urbano, David & Audretsch, David, 2016. "Institutional factors, opportunity entrepreneurship and economic growth: Panel data evidence," Technological Forecasting and Social Change, Elsevier, vol. 102(C), pages 45-61.
    18. Shengmin Sun, 2008. "The institutional change under lobbying and the distribution of power," Psychometrika, Springer;The Psychometric Society, vol. 3(3), pages 410-429, September.
    19. Usman Khalid, 2016. "Catch-up in Institutional Quality: An Empirical Assessment," Discussion Papers 2016-04, University of Nottingham, CREDIT.
    20. Gradstein, M., 2007. "Institutional Traps and Economic Growth," Cambridge Working Papers in Economics 0769, Faculty of Economics, University of Cambridge.
    21. Houda Haffoudhi & Racem Mehdi & Gam Abdelkader, 2015. "Understanding Democratic Transition Using Self-Organizing Maps: a Special Focus on Arab Spring Countries," Working Papers 958, Economic Research Forum, revised Oct 2015.
    22. Chong, Alberto & Gradstein, Mark, 2006. "Imposed Institutions and Preferences for Redistribution," CEPR Discussion Papers 5922, C.E.P.R. Discussion Papers.
    23. Tugores, Juan, 2008. "Regional integration and public policy. Evaluation of the European experience and possible implications for Latin American integration," Estudios y Perspectivas – Sede Subregional de la CEPAL en México 65, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    24. Donato De Rosa, 2006. "Explaining Russian manufacturing exports: Firm characteristics and external conditions," PSE Working Papers halshs-00590449, HAL.

    More about this item

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative
    • N40 - Economic History - - Government, War, Law, International Relations, and Regulation - - - General, International, or Comparative
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

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