Lecture 5-1 (econ 313)

Lecture 5-1 (econ 313) - Lecture 5: Institutions Readings:...

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Lecture 5: Institutions Readings: Todaro, end of Chapter 2
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Introduction Our models of development are not satisfactory: much remains unexplained But: (Solow: y=f(k) ) And Education USA = 3.1*Education NIGER (Solow with technical progress) Rest: a factor of 7.7 to explain. Coordination failure: multiple equilibrium, but which one? Depends on initial conditions, history NIGER USA L Y L Y = * 35 NIGER USA L K L K = * 5 . 1
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Today: institutions matter! 1. Definition 2. Theoretical impact 3. Empirical proof: 1. Impact of institutions 2. The colonial origins of institutions 3. Microeconomic evidence: grassroots democracy in Indonesia
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1. Definition of Institutions The idea that institutions are an important aspect of economic development is far from new. Douglass North: Nobel prize in economics (1990) for his work on work on institutions His definition of institutions: The humanly devised constraints that shape social interaction The rules of the game
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Functions of institutions Institutions have two main functions: facilitating cooperation between private actors, gains from trade restraining powerful actors, especially predatory governments
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Institutions But even with this precise definition, still vague There are at least four aspects of institutions: Economic institutions Political institutions Cultural/social institutions Legal institutions
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Economic Institutions Markets Trade Unions Trade-Organizations Cartels Structures of property rights (communal versus individualistic) Systems of land ownership Labour regulations
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Political Institutions Electoral system Legislative procedures Extent of centralization Party Systems Presidential/parliament: constitution
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Cultural/Social Institutions Social networks Social norms Marriage patterns Religious adherence Gender relations
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Legal Institutions Courts Legal codes (civil law versus common law)
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Plan In this lecture, we will try to look at two things: Why would institutions affect aggregate economic performance? What does the evidence look like? Attractive theory: explains the role of history, luck, since institutions are slow-changing But is this a deterministic view of the world?
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2. Theoretical impact of institutions Up to now, macro-perspective But we want to understand how institutions, the “rules of the game”, affect incentives Use microeconomic approach Remember the two main functions: facilitating cooperation between private actors, gains from trade restraining powerful actors, especially predatory governments
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Example 1: exchange Seller S and buyer B want to exchange a good S thinks it’s worth 10$ (real private valuation, not first asking price) B thinks it’s worth 30$ They bargain to a price of 20$
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This note was uploaded on 03/10/2012 for the course ECON 313 taught by Professor Iforget during the Winter '10 term at McGill.

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Lecture 5-1 (econ 313) - Lecture 5: Institutions Readings:...

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