Industrialization and the Evolution of Enforcement Institutions

Latchezar Popov and Toshihiko Mukoyama
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Latchezar Popov: The University of Virginia

No 1275, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: We analyze the evolution of economic institution during the process of industrialization. In particular, we focus on the institution of contract enforcement. Empirically, we show that, during the process of industrialization, countries tend to shift their manufacturing production towards industries that require more relationship-specific investment. Theoretically, we build a dynamic model with incomplete contracts and evolving institutions to account for this pattern. In our model, the incompleteness of contract leads to two types of misallocations that leads to production inefficiency: unbalanced use of inputs and unbalanced production of different goods. In addition to this production inefficiency, the imperfect contract enforcement leads to distortions in factor supply. The government invests in enforcement institutions in order to improve the contractual environment, and the evolution of industry composition crucially depends on how contractual environment changes over time.

Date: 2015
New Economics Papers: this item is included in nep-dge and nep-gro
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Journal Article: Industrialization and the evolution of enforcement institutions (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:1275

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