Joint UNU-MERIT/School of Governance Seminar
Featured speaker: Carmine Guerriero, Assistant Professor at the University of Amsterdam and Fellow of the Amsterdam Center for Law and Economics
Topic: Endogenous (In)Formal Institutions
Although the importance of the historical strength of both norms of cooperation and efficient political institutions in shaping contemporary economic development is well documented, we still lack an organic framework which identifies the origins and isolates the separate roles of these settings. Speaker Guerriero will present a model in which a majority of “citizens”’ and a minority of “elite”’ members either invest in a new technology or try to hedge against consumption risk.
Both the incentive to cheat when risk-sharing and the surplus from investment are shaped by an activity-specific factor. First, each group decides the psychological gain from cooperating which is costly to instill in its members. Then, the elite chooses the political regime: while democracy allows the citizens to fix the share of surplus to spend on the production of one of the two possible public goods, autocracy implies that the elite retains the power to set the sharing arrangement. Next, agents are matched. If two agents of the same type meet, a risk-sharing game is played, otherwise the elite decides between sharing risk and investment, which is successful only when both agents cooperate.
The groups value public goods differently, and are technologically constrained in producing the one preferred by the others. Provided that these differences are sufficiently wide: (i) each factor has a first order effect only on the institution more related to the economic activity it determines; (ii) cultural formation and democratization reinforce each other when showing commitment to future cooperation is necessary to bring investment; and (iii) technological shocks could destroy valuable institutions by affecting the related economic activity. Estimates based on data on the 11th to 17th centuries geographical features and institutions of 98 European regions are consistent with this prediction.
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