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Institutional trap


  • Quy-Toan Do


The author studies the persistence of inequality and inefficient governance in a physical capital accumulation model with perfect information, missing credit markets, and endogenous barriers to entry. When access to investment opportunities is regulated, rent-seeking entrepreneurs form coalitions of potentially varying size to bribe a regulator to restrict entry. Small coalitions run short of resources, while large coalitions suffer more severe free-rider problems. The distribution of wealth thus determines the equilibrium coalition structure of the economy and consequently the level of regulatory capture. A dynamic analysis supports the persistence of inefficiencies in the long run. Initial conditions determine whether the economy converges to a steady state characterized by efficient governance and low levels of inequality, or a path toward an institutional trap where regulatory capture and wealth inequality reinforce each other.

Suggested Citation

  • Quy-Toan Do, 2004. "Institutional trap," Policy Research Working Paper Series 3291, The World Bank.
  • Handle: RePEc:wbk:wbrwps:3291

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    References listed on IDEAS

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    Cited by:

    1. Congdon Fors, Heather & Olsson, Ola, 2007. "Endogenous institutional change after independence," European Economic Review, Elsevier, vol. 51(8), pages 1896-1921, November.
    2. Raghuram G. Rajan & Rodney Ramcharan, 2016. "Constituencies and Legislation: The Fight Over the McFadden Act of 1927," Management Science, INFORMS, vol. 62(7), pages 1843-1859, July.
    3. Thai, Mai Thi Thanh & Turkina, Ekaterina, 2014. "Macro-level determinants of formal entrepreneurship versus informal entrepreneurship," Journal of Business Venturing, Elsevier, vol. 29(4), pages 490-510.
    4. Campante, Filipe R. & Ferreira, Francisco H.G., 2007. "Inefficient lobbying, populism and oligarchy," Journal of Public Economics, Elsevier, vol. 91(5-6), pages 993-1021, June.
    5. Douhan, Robin & Henrekson, Magnus, 2007. "The Political Economy of Entrepreneurship," Working Paper Series 716, Research Institute of Industrial Economics.
    6. Douhan, Robin & Henrekson, Magnus, 2008. "Productive and Destructive Entrepreneurship in a Political Economy Framework," Working Paper Series 761, Research Institute of Industrial Economics.

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