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The Poor, the Rich and the Enforcer: Institutional Choice and Growth

  • Erwan Quintin

    (Federal Reserve Bank of Dallas)

  • Cyril Monnet

    (Federal Reserve Bank of Philadelphia)

  • Thorsten Koeppl

    (Queen's University)

We study economies where improving the quality of institutions -- modelled 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.

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Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 281.

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Date of creation: 2008
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Handle: RePEc:red:sed008:281
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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