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Endogenous Institutional Change and Privileged Groups

Karim Khan

The Pakistan Development Review, 2015, vol. 54, issue 3, 171-195

Abstract: Since the recent advances in the institutional perspective of economic development, there is considerable increase in the literature on the evolution of institutions. In this study, while employing the game theoretic approach, we explore the rent-seeking fundamentals of institutions. We model the manner in which the rent-seeking behaviour of state actors results in inefficiency of the institutional framework. The main focus is on the rents provided by the availability of natural resources wealth, foreign aid or corruption potential. By originating a framework where rulers, agents of the state, and citizens act endogenously, we show that the rents from these resources can be a significant constraint to institutional reforms. In order to come out of the bad institutions trap, the society needs to offer a substantial amount of incentives to the privileged groups. The focus is on two privileged groups, i.e. the rulers and the state agents. In most of the societies, these two groups have the highest bargaining power in the negotiations over the rules and institutions.

Keywords: Institutional Reforms; Natural Resources Wealth; Foreign Aid; Corruption Potential; Rulers; Agents of the State (search for similar items in EconPapers)
JEL-codes: P48 P16 P14 O43 D73 (search for similar items in EconPapers)
Date: 2015
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