Abstract
This paper analyzes the impact of weak contracting institutions on economic development and the wealth distribution in a Ramsey-type growth model. We show that, at low levels of accumulation, weak contracting institutions strongly favor the economic elite: By preventing market entry, such institutions provide the “oligarchs” with cheap access to credit—which is highly beneficial as long as capital is scarce. At the same time, a broad cross-section of society faces only low returns so that capital accumulation is slowed down and the capital stock gets concentrated in the hands of the elite. At higher levels of development, however, weak contracting institutions are harmful to all segments of society and institutional reform becomes unanimously supported. So the model helps to explain the pervasiveness of weak contracting institutions in less-advanced economies.
Article PDF
Similar content being viewed by others
Avoid common mistakes on your manuscript.
References
Acemoglu D. (2008) Oligarchic versus democratic societies. Journal of the European Economic Association 6(1): 1–44
Acemoglu D., Antràs P., Helpman E. (2007) Contracts and technology adoption. American Economic Review 97(3): 916–943
Acemoglu D., Johnson S., Robinson J. A. (2001) The colonial origins of comparative development: An empirical investigation. American Economic Review 91(5): 1369–1401
Acemoglu D., Verdier T. (1998) Property rights, corruption and the allocation of talent: A general equilibrium approach. Economic Journal 108: 1381–1403
Aghion P., Banerjee A., Piketty T. (1999) Dualism and macroeconomic volatility. Quarterly Journal of Economics 114(4): 1359–1397
Aghion P., Bolton P. (1997) A theory of trickle-down growth and development. Review of Economic Studies 64(2): 151–172
Aghion P., Howitt P., Mayer-Foulkes D. (2005) The effect of financial development on convergence: Theory and evidence. Quarterly Journal of Economics 120(1): 173–222
Antràs P., Helpman E. (2004) Global sourcing. Journal of Political Economy 112(3): 552–580
Banerjee A., Duflo E. (2005) Growth theory through the lens of development economics. In: Aghion P., Durlauf S. (eds) Handbook of economic growth. Elsevier, Amsterdam
Banerjee A., Newman A. (1991) Risk-bearing and the theory of income distribution. Review of Economic Studies 58(1): 211–235
Banerjee A., Newman A. (1993) Occupational choice and the process of development. Journal of Political Economy 101(2): 274–298
Beck T., Demirgüç-Kunt A., Levine R. (2003) Law, endowments, and finance. Journal of Financial Economics 70(2): 137–181
Bénabou R. (1996) Inequality and growth. In: Bernanke B., Rotemberg J. (eds) NBER macroeconomics annual 1996. MIT Press, Cambridge
Bertola G., Föllmi R., Zweimüller J. (2006) Distribution in macroeconomic models. Princeton University Press, Princeton
Braguinsky S., Myerson R. B. (2007) Capital and growth with oligarchic property rights. Review of Economic Dynamics 10(4): 676–704
Caselli, F., & Gennaioli, N. (2006). Dynastic management. CEP Discussion Paper No 741, LSE.
Chang S.-J. (2003) Financial crisis and transformation of Korean business groups. Cambridge University Press, Cambridge
Chatterjee S. (1994) Transitional dynamics and the distribution of wealth in a neoclassical growth model. Journal of Public Economics 54(1): 97–119
Coatsworth J. (1978) Obstacles to economic growth in nineteenth-century Mexico. American Historical Review 83(1): 80–100
Djankov S., La Porta R., Lopez-de Silanes F., Shleifer A. (2002) The regulation of entry. Quarterly Journal of Economics 117(1): 1–37
Djankov S., McLiesh C., Shleifer A. (2005) Private credit in 129 countries. Harvard University, Mimeo
Engerman S., Sokoloff K. (1997) Factor endowments, institutions, and differential path of growth among new world economies: A view from economic historians of the United States. In: Stephen H. (eds) How Latin America fell behind. Stanford University Press, Stanford, CA
Erosa A., Hidalgo Cabrillana A. (2008) On finance as a theory of TFP, cross-industry productivity differences, and economic rents. International Economic Review 49(2): 437–473
Galor O., Moav O. (2004) From physical to human capital accumulation: Inequality and the process of development. Review of Economic Studies 71(4): 1001–1026
Galor O., Moav O. (2006) Das human-kapital: A theory of the demise of the class structure. Review of Economic Studies 73(1): 85–117
Galor O., Moav O., Vollrath D. (2009) Inequality in landownership, the emergence of human-capital promoting institutions, and the great divergence. Review of Economic Studies 76(1): 143–179
Galor O., Zeira J. (1993) Income distribution and macroeconomics. Review of Economic Studies 60(1): 35–52
Haber S. (1989) Industry and underdevelopment: The industrialization of Mexico, 1890–1940. Stanford University Press, Stanford
Haber S. (1991) Industrial concentration and the capital markets: A comparative study of Brazil, Mexico, and the United States, 1830–1930. Journal of Economic History 51(3): 559–580
Haber S., Razo A., Maurer N. (2003) The politics of property rights. Cambridge University Press, Cambridge
Hadi A. (1992) Identifying multiple outliers in multivariate data. Journal of the Royal Statistical Society B 54(3): 761–771
Hall R., Jones C. (1999) Why do some countries produce so much more output per worker than others?. Quarterly Journal of Economics 114(1): 83–116
Kaldor N. (1956) Alternative theories of distribution. Review of Economic Studies 23(2): 83–100
Kang D. (2002a) Crony capitalism: Corruption and development in South Korea and the Philippines. Cambridge University Press, Cambridge
Kang D. (2002b) Bad loans to good friends: Money, politics, and the developmental state in South Korea. International Organizations 56(1): 177–207
Krusell P., Ríos-Rull J.-V. (1996) Vested interests in a positive theory of stagnation and growth. Review of Economic Studies 63(2): 301–329
Kuznets S. (1955) Economic growth and income inequality. American Economic Review 45(1): 1–28
Maddison A. (2007). World population, GDP and Per Capita GDP, 1-2003 AD, Data set available on http://www.ggdc.net/maddison/.
Matsuyama K. (2000) Endogenous inequality. Review of Economic Studies 67(4): 743–759
Matsuyama K. (2006) The 2005 Lawrence R. Klein lecture: Emergent class structure. International Economic Review 47(2): 327–360
Maurer N. (2002) The power and the money: The Mexican financial system 1876–1932. Stanford University Press, Stanford
Mookherjee D., Ray D. (2002) Is inequality stable?. American Economic Review 92(2): 253–259
Mookherjee D., Ray D. (2003) Persistent inequality. Review of Economic Studies 70(2): 369–393
Piketty T. (1997) The dynamics of the wealth distribution and the interest rate with credit rationing. Review of Economic Studies 64(2): 173–189
Rajan R., Zingales L. (2003) The great reversals: The politics of financial development in the twentieth century. Journal of Financial Economics 69(1): 5–50
Razo A., Haber S. (1998) The rate of growth of productivity in Mexico, 1850–1933: Evidence from the cotton textile industry. Journal of Latin American Studies 30(3): 481–517
Rose-Ackerman S. (1999) Corruption and government: Causes, consequences, and reform. Cambridge University Press, New York
Treisman D. (1995) The politics of soft credit in post-Soviet Russia. Europa-Asia Studies 47(6): 949–976
Open Access
This article is distributed under the terms of the Creative Commons Attribution Noncommercial License which permits any noncommercial use, distribution, and reproduction in any medium, provided the original author(s) and source are credited.
Author information
Authors and Affiliations
Corresponding author
Additional information
The author thanks Daron Acemoglu, Abhijit Banerjee, Giuseppe Bertola, Johannes Binswanger, Josef Falkinger, Ernst Fehr, Reto Föllmi, Oded Galor, Anke Gerber, Dirk Krueger, Torsten Persson, Klaus Reiner Schenk-Hoppé, Guido Tabellini, Harald Uhlig, Fabrizio Zilibotti, Josef Zweimü ller, and seminar participants at Boston University, Brown University, the European Winter Meeting of the Econometric Society in Instanbul, the Federal Reserve Bank of Chicago, the German Macro Workshop in Würzburg, M.I.T., the University of Leicester, and the University of Zurich for helpful comments.
Rights and permissions
Open Access This is an open access article distributed under the terms of the Creative Commons Attribution Noncommercial License (https://creativecommons.org/licenses/by-nc/2.0), which permits any noncommercial use, distribution, and reproduction in any medium, provided the original author(s) and source are credited.
About this article
Cite this article
Oechslin, M. Creditor protection and the dynamics of the distribution in oligarchic societies. J Econ Growth 14, 313–344 (2009). https://doi.org/10.1007/s10887-009-9047-9
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10887-009-9047-9