Institutional Trap [electronic resource] / Do, Quy-Toan

By: Do, Quy-ToanContributor(s): Do, Quy-ToanMaterial type: TextTextPublication details: Washington, D.C., The World Bank, 2004Description: 1 online resource (35 p.)Subject(s): Agents | Bargaining | Consensus | Corruption | Entry | GDP | Gi | Index | Institutional Change | Iru | Licensing | Ms | Nature | Production | Roads and Highways | Supply | Transport | Vd | Vdu | Wealth | Wealth Constraints | ZdvAdditional physical formats: Do, Quy-Toan.: Institutional Trap.Online resources: Click here to access online 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.
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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.

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