In recent empirical work, institutions have been shown to explain a significant
share of the differences in cross-country accumulation, productivity, and output levels. In
this paper we embed endogenous institutions into an R&D based growth model to study
how incentives to protect and exploit property rights affect economic growth. Our model
explains institutional differences across countries and highlights institutional development
thresholds. We show that market size (partially determined by the size of the population)
is a crucial determinant of the existence and quality of institutions. Second, endogenous
institutions are shown to generate multiple equilibria and an institutional development
threshold that must be overcome if an economy is to have strong institutions and rapid
growth in the long run. This result is in line with the observed transition of early/small
economic communities with common property laws to mature nation states with large
institution-based societies. |
