Institutional Trap

35 Pages Posted: 20 Apr 2016

See all articles by Quy-Toan Do

Quy-Toan Do

World Bank - Development Research Group (DECRG)

Date Written: April 22, 2004

Abstract

The author studies the persistence of inequality and inefficient governance in a physical capital accumulation model with perfect information, missing credit markets, and endogenous barriers to entry. When access to investment opportunities is regulated, rent-seeking entrepreneurs form coalitions of potentially varying size to bribe a regulator to restrict entry. Small coalitions run short of resources, while large coalitions suffer more severe free-rider problems. The distribution of wealth thus determines the equilibrium coalition structure of the economy and consequently the level of regulatory capture. A dynamic analysis supports the persistence of inefficiencies in the long run. Initial conditions determine whether the economy converges to a steady state characterized by efficient governance and low levels of inequality, or a path toward an institutional trap where regulatory capture and wealth inequality reinforce each other.

This paper - a product of the Poverty Team, Development Research Group - is part of a larger effort in the group to understand the determinants of institutions.

Keywords: Institutions, inequality, endogenous coalitions, persistence

JEL Classification: O12, D31, D45, D72

Suggested Citation

Do, Quy Toan, Institutional Trap (April 22, 2004). World Bank Policy Research Working Paper No. 3291. Available at SSRN: https://ssrn.com/abstract=610335

Quy Toan Do (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
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Washington, DC 20433
United States

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