Wednesday, June 22, 2011

Legal Institutions, Innovation and Growth

This paper looks interesting.

Legal Institutions, Innovation and Growth

LUCA ANDERLINI, Georgetown University - Department of Economics
LEONARDO FELLI, London School of Economics - Department of Economics, CESifo (Center for Economic Studies and Ifo Institute for Economic Research), Centre for Economic Policy Research (CEPR)
GIOVANNI IMMORDINO, Università degli Studi di Salerno - Centre for Studies in Economics and Finance (CSEF)
ALESSANDRO RIBONI, University of Montreal - Department of Economics
We analyze the relationship between legal institutions, innovation and growth. We compare a rigid (law set ex-ante) legal system and a flexible one (law set after observing current technology). The flexible system dominates in terms of welfare, amount of innovation and output growth at intermediate stages of technological development - periods when legal change is needed. The rigid system is preferable at early stages of technological development, when (lack of) commitment problems are severe. For mature technologies the two legal systems are equivalent. We find that rigid legal systems may induce excessive (greater than first-best) R&D investment and output growth.

Sunday, June 12, 2011

Risk, Institutions and Growth: Why England and Not China?

There is a new and interesting paper by Avner Grief of Stanford's Economics Department, Risk, Institutions and Growth: Why England and Not China?

ABSTRACT: We analyze the role of risk-sharing institutions in transitions to modern economies. Transitions require individual-level risk-taking in pursuing productivity-enhancing activities including developing, adopting, and using new knowledge. Individual-level, idiosyncratic risk implies that distinct risk sharing institutions - even those providing the same level of insurance - can lead to different growth trajectories if they differently motivate risk-taking. Historically, risk sharing institutions were selected based on their cultural and institutional compatibility and not their unforeseen growth implications.

We simulate our growth model incorporating England's and China's distinct pre-modern risk-sharing institutions. The model predicts a transition in England and not China even with equal levels of risk sharing. Under the clan-based Chinese institution, the relatively risk-averse elders had more control over technological choices implying lower risk-taking.

Focusing on non-market institutions expands on previous growth-theoretic models to highlight that transitions can transpire even in the absence of exogenous productivity shocks or time-dependent state variables. Recognizing the role of non-market institutions in the growth process bridges the view that transitions are due to luck and the view that transitions are inevitable. Transitions transpire when 'luck' creates the conditions under which economic agents find it beneficial to make the choices leading to positive rates of technological change. Luck came in the form of historical processes leading to risk-sharing institutions whose unintended consequences encouraged productivity-enhancing risk-taking.