Working Paper: NBER ID: w10481
Authors: Daron Acemoglu; Simon Johnson; James Robinson
Abstract: This paper develops the empirical and theoretical case that differences in economic institutions are the fundamental cause of differences in economic development. We first document the empirical importance of institutions by focusing on two 'quasi-natural experiments' in history, the division of Korea into two parts with very different economic institutions and the colonization of much of the world by European powers starting in the fifteenth century. We then develop the basic outline of a framework for thinking about why economic institutions differ across countries. Economic institutions determine the incentives of and the constraints on economic actors, and shape economic outcomes. As such, they are social decisions, chosen for their consequences. Because different groups and individuals typically benefit from different economic institutions, there is generally a conflict over these social choices, ultimately resolved in favor of groups with greater political power. The distribution of political power in society is in turn determined by political institutions and the distribution of resources. Political institutions allocate de jure political power, while groups with greater economic might typically possess greater de facto political power. We therefore view the appropriate theoretical framework as a dynamic one with political institutions and the distribution of resources as the state variables. These variables themselves change over time because prevailing economic institutions affect the distribution of resources, and because groups with de facto political power today strive to change political institutions in order to increase their de jure political power in the future. Economic institutions encouraging economic growth emerge when political institutions allocate power to groups with interests in broad-based property rights enforcement, when they create effective constraints on power-holders, and when there are relatively few rents to be captured by power-holders. We illustrate the assumptions, the workings and the implications of this framework using a number of historical examples.
Keywords: economic institutions; economic growth; political institutions; causal inference
JEL Codes: N11; N13; N15; N16; N17; O10; P10; P17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| economic institutions (D02) | economic growth (O49) |
| strong property rights and inclusive economic institutions (P14) | higher growth rates (O49) |
| differences in economic institutions (P39) | cross-country disparities in economic prosperity (P17) |
| political institutions (D02) | good economic institutions (E02) |
| political institutions check power of elites (D72) | prevent concentration of power leading to extractive institutions (O17) |
| regions with lower mortality rates (I14) | stronger property rights (P14) |
| political institutions (D02) | allocation of de jure power (D72) |
| allocation of de jure power (D72) | influence distribution of resources (D30) |
| influence distribution of resources (D30) | impact economic institutions (O43) |
| historical mortality rates of European settlers (N33) | development of economic institutions (O43) |