On Corruption and Institutions in Decentralized Eco

This paper presents a model of opportunistic behaviour in decentralized economic exchange and considers the impact of inadequate institutional framework of formal contract enforcement on economic performance. It is shown that (i) when the number of cheating traders is sufficiently large, inadequate institutions result in a loss of decentralized trading contracts, (ii) an adequate institutional framework, while being necessary for the attainment of a Pareto optimal outcome, may not be sufficient if traders perceive it as inadequate; and (iii) sufficiently good formal enforcement provisions help deter contractual breach in enviroments with corrupt and powerful enforcers.Formal contract enforcement; perceptions; transition economies

On Corruption and Institutions in Decentralised Economies

This paper studies opportunistic behaviour in a model of decentralised economic exchange and inadequate institutional framework of formal contract enforcement. It is shown that (i) when the number of cheating traders is sufficiently large, inadequate institutions result in a loss of decentralised trading contracts which suggests yet another explanation of the output fall puzzle of the recent transition experience; (ii) while being necessary for the attainment of a Pareto optimal outcome, an adequate institutional framework may not be sufficient if traders perceive it as inadequate; and (iii) in the presence of adequate institutional framework, even if enforcers are corrupt contractual breach is deterred when enforcers enjoy strong bargaining power.

Public Banks and the Productivity of Capital

Weak institutions are shown to create scope for public banks to play a growth-promoting role, even if such banks are less efficient than private banks.Economic growth; governance; regulation

Finance and Growth: What We Know and What We Need To Know

The paper reviews recent literature on the relationship between finance and growth, highlighting areas where we need to know more. The paper argues that institutions, such as financial regulation, have a first-order effect on financial development and growth, and that their effectiveness could determine the success or failure of policies like bank privatisation or financial liberalisation. It concludes that a better understanding of the obstacles to financial development, which include institutional, legal and political economy constraints, is needed.

Corruption, Extortion, and the Boundaries of the Law

We consider a set-up in which a principal must decide whether or not to legalise a socially undesirable activity. The law is enforced by a monitor who may be bribed to conceal evidence of the offence and who may also engage in extortionary practices. The principal only declares the activity illegal if the activity if "very harmful" and if the private benefit (received by the agent if she breaks the law) is "high". We present comparative static results and highlight policy implications.Moral Hazard, Collusion, Non-contractive Output, Rewards and Punishments

Sources and Effectiveness of Financial Development: What We Know and What We Need to Know

financial development, growth, institutions, banking

Government Ownership of Banks, Institutions, and Financial Development

Using a suitably modified locational model of banking, we examine the influence of institutions, such as deposit contract enforcement, in explaining the share of government owned banks in the banking system. We present cross-country evidence suggesting that institutional factors are relatively more important determinants of the share of state banks than political or historical ones. We argue that rather than privatizing or subsidizing state banks governments in developing countries should build institutions that foster the development of private banking.Regulation; opportunistic banks; institutional quality

Is Government Ownership of Banks Really Harmful to Growth?

We show that previous results suggesting that government ownership of banks is associated with lower long run growth rates are not robust to adding more “fundamental” determinants of economic growth. We also present new cross-country evidence for 1995- 2007 which suggests that, if anything, government ownership of banks has been robustly associated with higher long run growth rates. While acknowledging that cross-country results need not imply causality, we nevertheless provide a conceptual framework, drawing on the global financial crisis of 2008-09, which explains why under certain circumstances government owned banks could be more conducive to economic growth than privately-owned banks.

Is Government Ownership of Banks Really Harmful to Growth?

We show that previous results suggesting that government ownership of banks has a negative effect on economic growth are not robust to adding more 'fundamental' determinants of economic grwoth, such as institutions. We also present regression results from a more recent period (1995-2007) which suggest that, if anything, government ownership of banks has been associated with higher long run growth rates, even after controlling for institutions and other variables suggested by the growth literature. Drawing on the current global financial crisis, we provide a conceptual framework which explains why under certain circumstances government owned banks could have a greater effect on economic growth than privately-owned banks.

Is Government Ownership of Banks Really Harmful to Growth?

We put forward a modern version of the 'developmental' view of government-owned banks which shows that the combination of information asymmetries and weak institutions creates scope for such banks to play a growth-promoting role. We present new cross-country evidence consistent with our theoretical predictions. Specifically, we show that during 1995-2007 government ownership of banks has been robustly associated with higher long run growth rates. Moreover, we show that previous results suggesting that government ownership of banks is associated with lower long run growth rates are not robust to conditioning on more 'fundamental' determinants of economic growth.Public banks, economic growth, quality of governance, regulation