Efficient Institutions

FRB of Philadelphia Working Paper No. 08-33

29 Pages Posted: 5 Feb 2009

See all articles by Thorsten V. Koeppl

Thorsten V. Koeppl

Queen's University - Department of Economics

Cyril Monnet

Federal Reserve Bank of Philadelphia

Erwan Quintin

Federal Reserve Bank of Dallas

Date Written: December 15, 2008

Abstract

Are efficiency considerations important for understanding differences in the development of institutions? We model institutional quality as the degree to which obligations associated with exchanging capital can be enforced. Establishing a positive level of enforcement requires an aggregate investment of capital that is no longer available for production. When capital endowments are more unequally distributed, the bigger dispersion in marginal products makes it optimal to invest more resources in enforcement. The optimal allocation of the institutional cost across agents is not monotonic and entails a redistribution of endowments before production begins. Investing in enforcement benefits primarily agents at the bottom of the endowment distribution and leads to a reduction in consumption and income inequality. Efficiency, redistribution and the quality of institutions are thus intricately linked and should be studied jointly.

Keywords: Enforcement, Institutions, Inequality, Human and Physical Capital

JEL Classification: D31, D52, O11, O43

Suggested Citation

Koeppl, Thorsten V. and Monnet, Cyril and Quintin, Erwan, Efficient Institutions (December 15, 2008). FRB of Philadelphia Working Paper No. 08-33, Available at SSRN: https://ssrn.com/abstract=1335439 or http://dx.doi.org/10.2139/ssrn.1335439

Thorsten V. Koeppl (Contact Author)

Queen's University - Department of Economics ( email )

99 University Avenue
Kingston K7L 3N6, Ontario
Canada

Cyril Monnet

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Erwan Quintin

Federal Reserve Bank of Dallas ( email )

PO Box 655906
Dallas, TX 75265-5906
United States

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