The Impact of Simple Institutions in Experimental Economies with Poverty Traps

Authors: Capra, C. Mónica¹; Tanaka, Tomomi²; Camerer, Colin F.³; Feiler, Lauren⁴; Sovero, Veronica⁵; Noussair, Charles N.⁶

Source: The Economic Journal, Volume 119, Number 539, July 2009 , pp. 977-1009(33)

Publisher: Wiley-Blackwell

Buy & download fulltext article:

Price: $48.00 plus tax (Refund Policy)

Abstract:

We introduce an experimental approach to study the effect of institutions on economic growth. In each period, agents produce and trade output in a market, and allocate it to consumption and investment. Productivity is higher if total capital stock is above a threshold. The threshold externality generates two steady states - a suboptimal `poverty trap' and an optimal steady state. In a baseline treatment, the economies converge to the poverty trap. However, the ability to make public announcements or to vote on competing and binding policies, increases output, welfare and capital stock. Combining these two simple institutions guarantees that the economies escape the poverty trap.

Document Type: Research article

DOI: http://dx.doi.org/10.1111/j.1468-0297.2009.02262.x

Affiliations: 1: Emory University 2: Tilburg University 3: California Institute of Technology 4: Arizona State University 5: Carleton College 6: University of California, Los Angeles