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Private Incentives versus Class Interests: A Theory of Optimal Institutions with An Application to Growth

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  • Ani Guerdjikova

    (Cornell University)

  • Levon Barseghyan

    (Cornell University)

Abstract

We build a dynamic political economy model with a two-class society: workers and the elite. A key feature of the model is that the formation of the elite, the rate of innovation, taxes and public spending are endogenous. Differently from most of the literature on institutions and growth which emphasizes the conflict between different classes, we focus on the tension between private incentives of the members of the elite and their class interests. Our model explains the observed differences in colonization strategies by showing how the optimal choice of institutions depends on the initial conditions faced by colonizing powers. The model also creates a mapping between institutions and economic outcomes which is consistent with the observed differences in the patterns of economic growth.

Suggested Citation

  • Ani Guerdjikova & Levon Barseghyan, 2008. "Private Incentives versus Class Interests: A Theory of Optimal Institutions with An Application to Growth," 2008 Meeting Papers 939, Society for Economic Dynamics.
  • Handle: RePEc:red:sed008:939
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    References listed on IDEAS

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    8. Salvador Barbera & Matthew O. Jackson, 2004. "Choosing How to Choose: Self-Stable Majority Rules and Constitutions," The Quarterly Journal of Economics, Oxford University Press, vol. 119(3), pages 1011-1048.
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    11. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, vol. 84(3), pages 600-621, June.
    12. Perotti, Roberto, 1996. "Growth, Income Distribution, and Democracy: What the Data Say," Journal of Economic Growth, Springer, vol. 1(2), pages 149-187, June.
    13. James A. Robinson & Daron Acemoglu, 2000. "Political Losers as a Barrier to Economic Development," American Economic Review, American Economic Association, vol. 90(2), pages 126-130, May.
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    15. repec:tpr:qjecon:v:119:y:2004:i:3:p:1011-1048 is not listed on IDEAS
    16. Acemoglu, D, 1996. "Why Did the West Extend the Franchise? Inequality and Growth in Historical Perspetive," Working papers 96-32, Massachusetts Institute of Technology (MIT), Department of Economics.
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