Benevolent Dictators and Transaction Costs
27 Pages Posted: 21 Nov 2023
Date Written: November 21, 2023
Economists and other social scientists often propose creating new institutions to improve economic welfare. However, most institutions are never adopted and remain paper dreams. In this paper, I propose a simple model of institutional change where the optimal amount of power to invest in an institution depends on the underlying distribution of power, which affects the transaction costs of building coalitions supporting a particular institution. In the model, shifts in the distribution of power affect the transaction costs of building coalitions, and ultimately the institutions themselves. An application to the international monetary system shows how the model brings together several strands of literature on institutional change in a simple framework.
Keywords: power, institutions, coalitions, transaction costs
JEL Classification: B23, L52, O21, P11, F13
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