Growth with Endogenous Institutions

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 14.09.2004, 12:15 - 13:30


Presentation by 

Theo Eicher (University of Washington)


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.

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