an Eldis Resource
Modeling ineffecient institutions
Why do inefficient institutions persist?
Authors:
D. Acemoglu
Publisher:
National Bureau of Economic Research, USA, 2006
Many economists and social scientists have recently emphasised the importance of government institutions for economic growth. This paper develops a model to show why inefficient institutions are built and allowed to persist. The paper argues that it is in the interests of the governing elite to pursue inefficient policies in order to extract revenue from other groups, to reduce their demand for factors, thus indirectly benefiting from changes in factor prices, and to impoverish other groups competing for political power.
The model developed in the paper identifies three sources of inefficient policies:
- revenue extraction: the group in power will set high taxes on middle class producers in order to extract resources from them
- factor price manipulation: the group in power may want to tax middle class producers in order to reduce the prices of the factors they use in production
- political consolidation: the elite will attempt to tax the middle class in order to impoverish them and consolidate their political power
The paper argues that the key mechanism for institutional change is challenges from groups outside elite power structures. The model shows how the elite may be forced to change political institutions in order to make concessions in response to these challenges.
