Institutional trap

Quy-Toan Do

No 3291, Policy Research Working Paper Series from The World Bank

Abstract: The author studies the persistence of inequality and inefficient governance in a physical capital accumulation model with perfect information, missing credit markets, and endogenous barriers to entry. When access to investment opportunities is regulated, rent-seeking entrepreneurs form coalitions of potentially varying size to bribe a regulator to restrict entry. Small coalitions run short of resources, while large coalitions suffer more severe free-rider problems. The distribution of wealth thus determines the equilibrium coalition structure of the economy and consequently the level of regulatory capture. A dynamic analysis supports the persistence of inefficiencies in the long run. Initial conditions determine whether the economy converges to a steady state characterized by efficient governance and low levels of inequality, or a path toward an institutional trap where regulatory capture and wealth inequality reinforce each other.

Keywords: Roads&Highways; Information Technology; Health Monitoring&Evaluation; Gender and Health; Early Child and Children's Health (search for similar items in EconPapers)
Date: 2004-04-01
New Economics Papers: this item is included in nep-dev and nep-ent
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Citations: View citations in EconPapers (7)

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