There is now a broad consensus that cross-country differences in institutions are important for long-run economic performance. Work on understanding why institutions differ across countries, which specific dimensions of institutions matter more, and how institutions function in practice is just starting. This proposal outlines a number of ongoing and future projects on these topics. Ongoing projects: The first ongoing project explores historical variation in different dimensions of institutions among the former European colonies to identify the causal effect of different components of economic institutions. The second ongoing project attempts to open the black box of "property rights". It investigates the costs and benefits of different distributions of political power in society, which translate into creating better property rights (better incentives) for different groups in society. It shows the presence of a dynamic trade-off between oligarchic structures that give good investment incentives to established producers, while also creating a non-level playing field, versus democratic societies, which check the power of incumbent producers, but also may pursue distortionary (populist) redistributive policies. Future projects: The proposal also outlines three new projects. The first constructs a model to evaluate the costs and benefits of weak versus strong states. Although much of the recent political economy literature emphasizes the costs of unchecked power by the state, many political scientists and sociologists view "weak states," which are unable to raise taxes and provide public goods, as a major reason for underdevelopment. This project outlines a model in which the government, run by a self-interested ruler, must undertake productive investments in infrastructure or public goods. In this setup, both strong and weak states are parameterized by their ability to raise taxes, create costs. Strong states discourage investment by citizens, but weak states do not give enough future rents to rulers to encourage their investments. This framework enables the development of potential positive and normative theories of the organization of government. Second, the project will study the consequences of institutional reform replacing an established oligarchy by new power-holders, exploiting the spread of the French Revolution to Belgium, the Netherlands, Switzerland, western Germany and northern Italy. The final project is on new work towards developing a theory of leadership to understand how institutions function in practice, and how they can achieve coordination among agents with decentralized information.

Intellectual Merit: The projects outlined in this proposal are central to the development of an understanding of why institutions vary across countries and how this impacts on the potential for economic growth. This work, though very much in its infancy, has had a major effect on many branches of economics, including development economics, macroeconomics, public finance, labor economics, contract theory and industrial organization.

Broader impacts: An understanding of the institutional roots of economic prosperity can contribute to better policymaking, and results from recent research have featured in various policy debates. The empirical part of the work involves construction of new datasets, which can then be used by other researchers. Previous work by the PI has led to the development of new datasets that have been used by a large number of researchers and graduate students, and have been utilized for teaching in undergraduate and graduate classes.

National Science Foundation (NSF)
Division of Social and Economic Sciences (SES)
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Nancy A. Lutz
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Massachusetts Institute of Technology
United States
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