Institutional Trap
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.
| Main Author: | |
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| Format: | Policy Research Working Paper biblioteca |
| Language: | English en_US |
| Published: |
World Bank, Washington, D.C.
2004-04
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| Subjects: | INSTITUTIONS, INEQUALITY, ENDOGENOUS, COALITIONS, PERSISTENCE, |
| Online Access: | http://documents.worldbank.org/curated/en/2004/04/3391904/institutional-trap http://hdl.handle.net/10986/14771 |
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| Summary: | 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. |
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