A Tale of Markets and Jungles in a Simple Model of Growth

Abstract

Institutions determine prospects for economic growth and development. This paper collapses potentially complex interactions of different institutions into a simple condition on the primitives that determines whether a society supports spot markets or not. In a dynamic model of an agrarian economy agents are heterogeneous in land holdings, skill, and food endowments. Food holdings serve as a proxy for agents' power to expropriate. The main point of interest is whether land is assigned to the skilled or to the powerful, i.e.\ by coalitional expropriation or by markets. The model finds two different types of limit behavior: a sequence of stable markets and a limit cycle where markets and expropriation alternate. More equal first period endowment distributions facilitate sustainable markets that, in turn, enhance economic efficiency and decrease macroeconomic fluctuations.Expropriation, inequality, institutions, growth, volatility