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Institutional trap, Volume 1
Author:Quy-Toan Do; Country:World;
Date Stored:2004/05/10Document Date:2004/04/01
Document Type:Policy Research Working PaperSubTopics:Information Technology; Gender and Health; Roads & Highways; Health Monitoring & Evaluation; Early Child and Children's Health
Language:EnglishRegion:The World Region
Report Number:WPS3291Collection Title:Policy, Research working paper ; no. WPS 3291
Volume No:1  

Summary: 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.

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