Inclusive Institutions and Long-Run Misallocation
47 Pages Posted: 24 Oct 2013
Date Written: October 23, 2013
This research advances the hypothesis that resource abundant economies characterized by a socially cohesive workforce and network externalities triggered the emergence of efficiency-enhancing inclusive institutions designed to restrict mobility and to enhance the attachment of community members to the local labor market. However, the persistence of these institutions, and the inter-generational transmission of their value, ultimately resulted in the misallocation of talents across occupations and a reduction in the long-run level of income per capita in the economy as a whole. Exploiting variation in resource intensity across the American Midwest during its initial development, the empirical analysis establishes that higher initial resource-intensity in 1860 is indeed associated with greater community participation over the subsequent 150 years, and reduced mobility and labor misallocation in the contemporary period.
Keywords: Inclusive institutions, Exclusive institutions, Networks, Labor misallocation, Development, Persistence
JEL Classification: I12, J13, N3, O10
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