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Markets and jungles

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Abstract

Economic institutions determine prospects for growth and development. This paper examines necessary conditions for an economy to support institutions that implement markets. Agents differ in land holdings, skill, and power. A competitive market assigns land to the skilled, not necessarily to the powerful. Therefore a market allocation needs to be robust to coalitional expropriation. In a dynamic setting, market payoffs may induce sufficient inequality in next period’s endowments for markets to alternate with expropriation in a limit cycle, decreasing efficiency and amplifying macroeconomic fluctuations. Long run stability of markets is favored by higher social mobility, more initial equality, and less mismatch between skill and land.

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Authors and Affiliations

  1. Department of Economics, University of Bonn, Adenauerallee 24-42, 53113, Bonn, Germany

    Thomas Gall

  2. Economics Department and SFB 884, University of Mannheim, L7, 3-5, 68131, Mannheim, Germany

    Paolo Masella

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  1. Thomas Gall
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  2. Paolo Masella
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Correspondence to Thomas Gall.

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Gall, T., Masella, P. Markets and jungles. J Econ Growth 17, 103–141 (2012). https://doi.org/10.1007/s10887-011-9076-z

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