Efficient institutions

Are efficiency considerations important for understanding differences in the development of institutions? The authors model institutional quality as the degree to which obligations associated with exchanging capital can be enforced. Establishing a positive level of enforcement requires an aggregate investment of capital that is no longer available for production. When capital endowments are more unequally distributed, the bigger dispersion in marginal products makes it optimal to invest more resources in enforcement. The optimal allocation of the institutional cost across agents is not monotonic and entails a redistribution of endowments before production begins. Investing in enforcement benefits primarily agents at the bottom of the endowment distribution and leads to a reduction in consumption and income inequality. Efficiency, redistribution and the quality of institutions are thus intricately linked and should be studied jointly.Human capital ; Capital

PLANNING FOR NATIONAL DEVELOPMENT: AN AGENDA GUIDED BY THE SOCIOECONOMIC SYSTEM'S SOCIAL PHILOSOPHY

Co-operation among members of the world community is highly desirable, since it would be a step in the right direction to alleviate some of the world's problems. However, the current discussions on the harmonization of socio-economic systems and the globalization of trade goes beyond mere suggestions to the position that such a development is imminent and highly beneficial to the world community. For many countries being able to trade voluntarily with any country is highly desirable, but having to transform one's way of life to one single mode of operation poses far greater problems than those that currently are being experienced. This paper maintains that institutionalized macroeconomic planning, which can produce positive benefits to any and all societies, is the path that should be followed.globalization of trade, confron tational competition, managed trade, institutionalized macroeconomic planning, national economic policy de cisions.

The Poor, the Rich and the Enforcer: Institutional Choice and Growth

We study economies where improving the quality of institutions – modeled as improving contract enforcement – requires resources, but enables trade that raises output by reducing the dispersion of marginal products of capital. We find that in this type of environment it is optimal to combine institutional building with endowment redistribution, and that more ex-ante dispersion in marginal products increases the incentives to invest in enforcement. In addition, we show that institutional investments lead over time to a progressive reduction in inequality. Finally, the framework we describe enables us to formalize the hypothesis formulated by Engerman and Sokoloff (2002) that the initial concentration of human and physical capital can explain the divergence of different countries’ institutional history.Enforcement as a Choice, Institutions, Inequality, Human and Physical Capital

The poor, the rich and the enforcer: institutional choice and growth

We study economies where improving the quality of institutions – modeled as improving contract enforcement – requires resources, but enables trade that raises output by reducing the dispersion of marginal products of capital. We find that in this type of environment it is optimal to combine institutional building with endowment redistribution, and that more ex-ante dispersion in marginal products increases the incentives to invest in enforcement. In addition, we show that institutional investments lead over time to a progressive reduction in inequality. Finally, the framework we describe enables us to formalize the hypothesis formulated by Engerman and Sokoloff (2002) that the initial concentration of human and physical capital can explain the divergence of different countries’ institutional history.Human capital ; Macroeconomics

Portfolio regulation of life insurance companies and pension funds

This paper examines the rationale, nature and financial consequences of two alternative approaches to portfolio regulations for the long-term institutional investor sectors life insurance and pension funds. These approaches are, respectively, prudent person rules and quantitative portfolio restrictions. The argument draws on the financial-economics of investment, the differing characteristics of institutions’ liabilities, and the overall case for regulation of financial institutions. Among the conclusions are: · regulation of life insurance and pensions need not be identical; · prudent person rules are superior to quantitative restrictions for pension funds except in certain specific circumstances (which may arise notably in emerging market economies), and; · although in general restrictions may be less damaging for life insurance than for pension funds, prudent person rules may nevertheless be desirable in certain cases also for this sector, particularly in competitive life sectors in advanced countries, and for pension contracts offered by life insurance companies. These results have implications inter alia for an appropriate strategy of liberalisation. 1 The author is Professor of Economics and Finance, Brunel University, Uxbridge, Middlesex UB3 4PH, United Kingdom (e-mail ‘[email protected]’, website: ‘www.geocities.com/e_philip_davis’). He is also a Visiting Fellow at the National Institute of Economic and Social Research, an Associate Member of the Financial Markets Group at LSE, Associate Fellow of the Royal Institute of International Affairs and Research Fellow of the Pensions Institute at Birkbeck College, London. Work on this topic was commissioned by the OECD. Earlier versions of this paper were presented at the XI ASSAL Conference on Insurance Regulation and Supervision in Latin America, Oaxaca, Mexico, 4-8 September 2000, and at the OECD Insurance Committee on 30 November 2000. The author thanks participants at the conference and A Laboul for helpful comments. Views expressed are those of the author and not necessarily those of the institutions to which he is affiliated, nor those of the OECD. This paper draws on Davis and Steil (2000)

The Roles of the Environment and Natural Resources in Economic Growth Analysis

The primary aim of this paper is pedagogical. We first present and discuss a “wiring diagram” framework in order to elucidate the general links between economic growth and "natural capital." After developing the general framework, we develop parallel frameworks applicable to several specific sectors of the economy (agriculture, forestry, and manufacturing). Two appendices provide a mathematical formulation of the economy-wide framework and a brief historical review of the role of natural resources and the environment in economic growth theory.economic growth, natural resources, sustainable development

Target-driven investing: Optimal investment strategies in defined contribution pension plans under loss aversion

Assuming loss aversion, stochastic investment and labour income processes, and a path-dependent target fund, we show that the optimal investment strategy for defined contribution pension plan members is a target-driven 'threshold' strategy. With this strategy, the equity allocation is increased if the accumulating fund is below target and decreased if it is above. However, if the fund is sufficiently above target, the optimal investment strategy switches discretely to 'portfolio insurance'. We show that under loss aversion, the risk of failing to attain the target replacement ratio is significantly reduced compared with target-driven strategies derived from maximising expected utility.Defined Contribution Pension Plan; Investment Strategy; Loss Aversion; Target Replacement Ratio; Threshold Strategy, Portfolio Insurance, Dynamic Programming

Upgrading investment regulations in second pillar pension systems : a proposal for Colombia

The passivity of the demand for pension products is one of the striking features of mandatory pension systems. Consequently, the provision of multiple investment alternatives to households (multifund schemes) does not ensure that contributions are invested efficiently. In addition, despite the theoretical findings that short term return maximization is not conductive to long-term return maximization, the regulatory framework of pension fund management companies puts excessive emphasis on short-term maximization. Therefore, it is not obvious that typical regulatory framework of pension funds is conductive to optimal pensions. By establishing a set of default options on investment portfolios, this paper proposes a mechanism to align the incentives of the pension fund management companies with the long-term objectives of the contributors. The paper provides a methodology, which is subsequently applied to Colombia.Debt Markets,Emerging Markets,Financial Literacy,Mutual Funds,Investment and Investment Climate