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Endogenous (In)Formal Institutions.

Guerriero, Carmine and Boranbay, Serra (2012): Endogenous (In)Formal Institutions.

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Despite the huge evidence documenting the relevance of inclusive political institutions and a culture of cooperation, we still lack a framework that identifies their origins and interaction. In a model in which an elite and a citizenry try to cooperate in consumption risk-sharing and investment, we show that a rise in the investment value encourages the elite to introduce more inclusive political institutions to convince the citizenry that a sufficient part of the returns on joint investments will be shared. In addition, accumulation of culture rises with the severity of consumption risk if this is not too large and thus cheating is not too appealing. Finally, the citizenry may over-accumulate culture to credibly commit to cooperate in investment when its value falls and so inclusive political institutions are at risk. These predictions are consistent with the evolution of activity-specific geographic factors, monasticism, and political institutions in a panel of 90 European regions spanning the 1000-1600 period. Evidence from several identification strategies suggests that the relationships we uncover are causal.

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