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Endogenous enforcement institutions

Gani Aldashev and Giorgio Zanarone

Journal of Development Economics, 2017, vol. 128, issue C, 49-64

Abstract: Faster courts favor economic development in States with sufficiently constrained executive power, whereas they harm development in States where political power is relatively unconstrained. We document this novel pattern across developing countries, and build a simple model of the State as a self-enforcing social contract, which illustrates how power, and institutions that constrain or complement it, affect development. We show a tradeoff between the two facets of power—enforcement and expropriation. As the ruler’s power grows, his temptation to shirk on enforcement diminishes while the temptation to expropriate grows. Consequently, private enforcement optimally evolves into State enforcement. Moreover, faster courts relax the ruler’s incentive constraint on enforcement but tighten his non-expropriation incentive constraint; thus, the effect on development depends on which incentive constraint binds in equilibrium. Our results are consistent with the observed cross-country patterns and with historical evidence on transition from the “Law Merchant” enforcement system to the State.

Keywords: H11; K42; P48; Coercive power; Expropriation; Enforcement; State (search for similar items in EconPapers)
Date: 2017
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