Endogenous Institutional Change and Privileged Groups

In: The Pakistan development review: PDR, Band 54, Heft 3, S. 171-195

Abstract

Since the recent advances in the institutional perspective of
economic development, there is considerable increase in the literature
on the evolution of institutions. In this study, while employing the
game theoretic approach, we explore the rent-seeking fundamentals of
institutions. We model the manner in which the rent-seeking behaviour of
state actors results in inefficiency of the institutional framework. The
main focus is on the rents provided by the availability of natural
resources wealth, foreign aid or corruption potential. By originating a
framework where rulers, agents of the state, and citizens act
endogenously, we show that the rents from these resources can be a
significant constraint to institutional reforms. In order to come out of
the bad institutions trap, the society needs to offer a substantial
amount of incentives to the privileged groups. The focus is on two
privileged groups, i.e. the rulers and the state agents. In most of the
societies, these two groups have the highest bargaining power in the
negotiations over the rules and institutions. JEL Classification:JEL
Classification: P48, P16, P14, O43, D73 Institutional Reforms, Natural
Resources Wealth, Foreign Aid,Corruption Potential, Rulers, Agents of
the State