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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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  7. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
  8. Koeppl, Thorsten Volker, 2003. "Optimal dynamic risk sharing when enforcement is a decision variable," Working Paper Series 0282, European Central Bank.
  9. Edward L. Glaeser & Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2004. "Do Institutions Cause Growth?," Journal of Economic Growth, Springer, vol. 9(3), pages 271-303, 09.
  10. Aghion, Philippe & Caroli, Eve & García-Peñalosa, Cecilia, 1999. "Inequality and Economic Growth: The Perspective of the New Growth Theories," Scholarly Articles 12502063, Harvard University Department of Economics.
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  12. Acemoglu, Daron & Johnson, Simon & Robinson, James A., 2005. "Institutions as a Fundamental Cause of Long-Run Growth," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 6, pages 385-472 Elsevier.
  13. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-98, April.
  14. Andreoni, James, 1989. "Giving with Impure Altruism: Applications to Charity and Ricardian Equivalence," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1447-58, December.
  15. Galor, Oded & Moav, Omer, 2001. "Das Human Kapital," CEPR Discussion Papers 2701, C.E.P.R. Discussion Papers.
  16. Stanley L Engerman & Kenneth L. Sokoloff, 2002. "Factor Endowments, Inequality, and Paths of Development Among New World Economics," NBER Working Papers 9259, National Bureau of Economic Research, Inc.
  17. Easterly, William, 2007. "Inequality does cause underdevelopment: Insights from a new instrument," Journal of Development Economics, Elsevier, vol. 84(2), pages 755-776, November.
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