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

Listed author(s):
  • 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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File URL: https://economicdynamics.org/meetpapers/2008/paper_281.pdf
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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
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

Web page: http://www.EconomicDynamics.org/society.htm
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  1. Cecilia Garcia-Penalosa & Eve Caroli & Philippe Aghion, 1999. "Inequality and Economic Growth: The Perspective of the New Growth Theories," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1615-1660, December.
  2. Koeppl, Thorsten V., 2007. "Optimal dynamic risk sharing when enforcement is a decision variable," Journal of Economic Theory, Elsevier, vol. 134(1), pages 34-60, May.
  3. repec:dau:papers:123456789/10091 is not listed on IDEAS
  4. Galor, Oded & Moav, Omer, 2001. "Das Human Kapital," CEPR Discussion Papers 2701, C.E.P.R. Discussion Papers.
  5. 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.
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  12. 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 1447-1458, December.
  13. Narayana R. Kocherlakota, 2003. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Levine's Bibliography 666156000000000426, UCLA Department of Economics.
  14. Easterly, William, 2007. "Inequality does cause underdevelopment: Insights from a new instrument," Journal of Development Economics, Elsevier, vol. 84(2), pages 755-776, November.
  15. Dan Bernhardt & Huw Lloyd-Ellis, 1993. "Enterprise, Inequality and Economic Development," Working Papers 893, Queen's University, Department of Economics.
  16. 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.
  17. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
  18. Daron Acemoglu & Simon Johnson, 2003. "Unbundling Institutions," NBER Working Papers 9934, National Bureau of Economic Research, Inc.
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