How Much is too Much? An Endogenous Growth Model with an Optimal Level of Informality

Teodor Sedlarski (), Ilia Atanasov () and Alexandra Korcheva ()
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Teodor Sedlarski: Sofia University St. Kliment Ohridski, Faculty of Economics and Business Administration, Department of Economics
Ilia Atanasov: Sofia University St. Kliment Ohridski, Faculty of Economics and Business Administration, Department of Economics
Alexandra Korcheva: Sofia University St. Kliment Ohridski, Faculty of Economics and Business Administration, Department of Economics

Bulgarian Economic Papers from Faculty of Economics and Business Administration, Sofia University St Kliment Ohridski - Bulgaria // Center for Economic Theories and Policies at Sofia University St Kliment Ohridski

Abstract: We develop an endogenous growth model in which informal practices, trust and transaction costs take the key role and dictate the speed of the long-term economic development. A decision maker chooses how much informal behaviour to allow in the economic system in order to maximize the rate of innovation by taking into account the productivity gains and loses associated with building trust and lowering transaction costs. The model shows that economic systems in which changes in informal practices are taken into account will grow at a faster rate compared to economic systems in which the same changes are ignored. This provides an alternative explanation to divergence in output per capita between different countries from the point of view of the new institutional economics.

Keywords: economic growth; informal institutions; new institutional economics (search for similar items in EconPapers)
JEL-codes: D23 E71 O17 O43 Z1 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2023-02, Revised 2023-02
New Economics Papers: this item is included in nep-gro
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