Can't We All Be More Like Scandinavians? Asymmetric Growth and Institutions in an Interdependent World

49 Pages Posted: 21 Aug 2012  

Daron Acemoglu

Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

James A. Robinson

Harvard University - Department of Government; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Thierry Verdier

Paris School of Economics (PSE); Delta - Ecole Normale Superieure (ENS); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: August 20, 2012

Abstract

Because of their more limited inequality and more comprehensive social welfare systems, many perceive average welfare to be higher in Scandinavian societies than in the United States. Why then does the United States not adopt Scandinavian-style institutions? More generally, in an interdependent world, would we expect all countries to adopt the same institutions? To provide theoretical answers to this question, we develop a simple model of economic growth in a world in which all countries benefit and potentially contribute to advances in the world technology frontier. A greater gap of incomes between successful and unsuccessful entrepreneurs (thus greater inequality) increases entrepreneurial effort and hence a country’s contribution to the world technology frontier. We show that, under plausible assumptions, the world equilibrium is asymmetric: some countries will opt for a type of “cutthroat” capitalism that generates greater inequality and more innovation and will become the technology leaders, while others will free-ride on the cutthroat incentives of the leaders and choose a more cuddly form of capitalism. Paradoxically, those with cuddly reward structures, though poorer, may have higher welfare than cutthroat capitalists; but in the world equilibrium, it is not a best response for the cutthroat capitalists to switch to a more cuddly form of capitalism. We also show that domestic constraints from social democratic parties or unions may be beneficial for a country because they prevent cutthroat capitalism domestically, instead inducing other countries to play this role.

Keywords: cutthroat capitalism, economic growth, inequality, innovation, interdependences, technological change

JEL Classification: O40, O43, O33, P10, P16

Suggested Citation

Acemoglu, Daron and Robinson, James A. and Verdier, Thierry, Can't We All Be More Like Scandinavians? Asymmetric Growth and Institutions in an Interdependent World (August 20, 2012). MIT Department of Economics Working Paper No. 12-22. Available at SSRN: https://ssrn.com/abstract=2132939 or http://dx.doi.org/10.2139/ssrn.2132939

Daron Acemoglu (Contact Author)

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James A. Robinson

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Thierry Verdier

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