Efficient institutions

Thorsten V. Koeppl (), Cyril Monnet () and Erwan Quintin ()

No 08-33, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: Are efficiency considerations important for understanding differences in the development of institutions? The authors model institutional quality as the degree to which obligations associated with exchanging capital can be enforced. Establishing a positive level of enforcement requires an aggregate investment of capital that is no longer available for production. When capital endowments are more unequally distributed, the bigger dispersion in marginal products makes it optimal to invest more resources in enforcement. The optimal allocation of the institutional cost across agents is not monotonic and entails a redistribution of endowments before production begins. Investing in enforcement benefits primarily agents at the bottom of the endowment distribution and leads to a reduction in consumption and income inequality. Efficiency, redistribution and the quality of institutions are thus intricately linked and should be studied jointly.

Keywords: Human capital; Capital (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-reg
Date: 2008
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