The Impact of Simple Institutions in Experimental Economies with Poverty Traps

63 Pages Posted: 21 Apr 2005

See all articles by C. Monica Capra

C. Monica Capra

Claremont Graduate University

Tomomi Tanaka

The World Bank

Colin Camerer

California Institute of Technology - Division of the Humanities and Social Sciences

Lauren Munyan

California Institute of Technology

Veronica Sovero

California Institute of Technology

Lisa wang

California Institute of Technology

Charles N. Noussair

Tilburg University

Multiple version iconThere are 2 versions of this paper

Date Written: February 28, 2005

Abstract

The existence of multiple equilibria is one explanation for why some countries are rich while others are poor. This explanation also allows the possibility that changes in political and economic institutions might help poor countries jump from a bad economic equilibrium into a better one, permanently increasing their output and income. Experiments are a useful methodology to study the effect of institutions on economic growth. In this paper, we study a simple experimental economy in which agents produce output in each period and can allocate the output between consumption and investment (the experiment adds to the design of Lei and Noussair, 2002, 2003). Capital productivity is higher if total investment is above a threshold. The threshold externality generates two equilibria - a suboptimal poverty trap and an optimal rich country equilibrium - which differ by a factor of around three in the income they create. In baseline sessions, in which agents make independent decisions in a decentralized manner, the economies typically sink into the poverty trap and the optimal equilibrium is never reached. However, the ability to communicate before investing, or to vote on binding industrial policy proposals, improves average earnings. Communication enables agents to agree to restrain consumption to cross the capital threshold, and voting enables them to enforce such plans. Combining both of these simple institutions enables all of the economies to escape the poverty trap. This experimental environment constitutes a platform onto which more complex features can be added in a program of experimental growth economics.

Keywords: Economic growth, development, experimental economics, institutions, political economy

JEL Classification: O41, P16, C92

Suggested Citation

Capra, C. Monica and Tanaka, Tomomi and Camerer, Colin F. and Munyan, Lauren and Sovero, Veronica and wang, Lisa and Noussair, Charles N., The Impact of Simple Institutions in Experimental Economies with Poverty Traps (February 28, 2005). Available at SSRN: https://ssrn.com/abstract=703401 or http://dx.doi.org/10.2139/ssrn.703401

C. Monica Capra (Contact Author)

Claremont Graduate University ( email )

170 E. Tenth Street
Claremont, CA 91711
United States

Tomomi Tanaka

The World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Colin F. Camerer

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
Pasadena, CA 91125
United States
626-395-4054 (Phone)
626-432-1726 (Fax)

Lauren Munyan

California Institute of Technology ( email )

Pasadena, CA 91125
United States

Veronica Sovero

California Institute of Technology ( email )

Pasadena, CA 91125
United States

Lisa Wang

California Institute of Technology ( email )

Pasadena, CA 91125
United States

Charles N. Noussair

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

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