Endogenous Economic Institutions and Persistent Income Differences among High Income Countries

Christos Pargianas ()

Open Economies Review, 2016, vol. 27, issue 1, 139-159

Abstract: Why haven’t most western European countries, Canada, and Japan caught up to the United States? This paper develops an economic growth model with endogenous economic institutions, which provides an alternative theoretical explanation for the persistent income differences between the United States and the other high income countries. It argues that because innovation is more skill intensive than imitation, skilled individuals in the US (the leader country) have more human capital than skilled individuals in the other high income countries (the followers). This implies greater willingness and ability by skilled individuals in the US to actively participate in politics. As a result, US voters choose better for growth policies than the voters in the other high income countries, and this prevents the other high income countries from catching up to the United States. The model developed in this paper predicts that follower countries cannot fully catch up to the leader if they have the same or slightly better exogenous characteristics. They can only fully catch up if their exogenous characteristics are significantly better than those of the leader country. This result emphasizes the importance of historically given initial conditions. Copyright Springer Science+Business Media New York 2016

Keywords: Endogenous economic institutions; Club convergence; Economic growth; Human capital; F43; Ο43; Ο47 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1007/s11079-015-9363-y

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