Research program : Failing Institutions and Growth

[Matthias Doepke]

How is the quality of public education affected by the presence of private schools for the rich? Theory and evidence suggest that the link crucially depends on the structure of the political system. A large private education sector can benefit public schools in a broad-based democracy where politicians are responsive to the needs of families using public schools, but leads to disastrous outcomes in a society that is politically dominated by the rich.

This question was treated in the article below (among other things, see page on fertility) and was popularized by an article in Vox.

Discernibly is gender equality a multi-dimensional concept that encompasses women's access to economic resources, women's access to health programs, women's legal rights and civil liberties and so forth. In this paper, we want to formally clarify the role of various dimensions to gender inequality in fostering the transition toward faster growth. Acknowledging the enhancing effect of a reduced population growth in the shift from economic stagnation to sustained growth, we especially want to examine the pathways by which increases in gender equality may affect fertility. We do so by means of a household bargaining model in which we explicitly distinguish between the following gender-based gaps: the survival gap, the wage gap, the social and institutional gap and the educational gap.

[Clara Delavallade]

In two papers, we bridge the gap between the standard theory of growth and the mostly static theory of corruption. Part of public investment can be diverted from its purpose by corrupted individuals. Voters determine the level of public investment subject to an incentive constraint equalizing the returns from productive and corruption activities. We concentrate on two exogenous institutional parameters: the``technology of corruption'' is the easiness with which rent-seekers can capture part of public spending. The ``concentration of political power'' is the extent to which rent-seekers have more political influence than other people.

The first paper concentrates on the effects of the two institutional parameters on income growth and equilibrium corruption.

In the second paper the focus is on how failing institutions distort the allocation of resources between different types of public investment.

We explore the consequences of liberalized credit markets for growth and inequality. Relatively modest improvements in extending credit to the ablest households appear to have large economic consequences: upfront costs (slower initial growth, higher income inequality) followed by delayed benefits (faster long-run growth). Financial reform also lowers lifecycle utility for a substantial majority of currently active households. Premature liberalization in the least developed countries (low TFP or capital intensity) may redirect economic growth towards a poverty trap.

[Costas in his L.A. office]

In the following paper, we study a simple theoretical model where endogenous borrowing limits arise as the outcome of individual rationality constraint. We show that maximum growth can arise in an equilibrium with binding borrowing constraints, perhaps explaining the good performance of Asian countries despite imperfect credit markets.

Philippe Michel passed away on July 22, 2004. His death is a great loss for his friends and for the overlapping generations and optimal control community.

In the following article with Michel Lubrano (picture on the right), we use the model developed with Costas Azariadis to analyze the tradeoff between growth and equality in a variety of context. Here, we look at the effect of the ELIE scheme, which was developed by Kolm. It taxes labour capacities instead of labour income in order to circumvent the distortionary effect of taxation on labour supply. Still we show it has a distortionary effect on the education choice. ELIE is successful in reducing inequalities and poverty. A drop in the Gini coefficient by 0.10 goes with a reduction in the annual growth rate of 0.33\%. In an economy with an imperfect credit market where individuals cannot borrow to educate, the tradeoff between growth and equality is not overturned but is less severe.