1 . Introduction
Heed the Weakest Link : A Model of Interdependent Institutions
Institutions are a major determinant
of economic development ( Acemoglu & Robinson , 2005 ; North , 1990 ). There are a large number of factors that are important for economic growth ( Lipsey , 2009 ). Some authors have emphasized the importance of political stability and property rights ( Kormendi & Meguire , 1985 ), or levels of skill and human capital ( Kremer , 1993 ). Others have emphasized the importance of factors as diverse as the role of law , industrial innovation , human rights , trust , efficient financial markets , effective labor markets , and so on ( see e . g . Easterly and Levine ( 2001 ) for a survey ). The list is indeed long . In this paper , we focus on two characteristics of institutions — that they are numerous , and that they are interdependent . 2
Table 1 provides a brief literature review of some influential empirical investigations into the determinants of economic growth . A large number of factors have been included as candidate factors explaining economic growth , and we also observe that different authors have sought to explain economic growth in terms of different sets of factors . Even when a long list of independent variables is included , the explanatory power ( i . e . the R 2 ) of the regressions does not rise above about 60 %. Even including a long list of ex-
2 Our paper thus has many similarities with the “ O-ring ” production function introduced in Kremer ( 1993 ). However , many differences between our approach , and Kremer ’ s , can be mentioned . Kremer has a production function-based approach ( see his equation ( 1 )). Here we just have a sum of random terms . Kremer insists on skill , here we take a wider view and focus on institutions . Kremer shows no empirical evidence . Kremer says that n can be increased ( pp . 561 – 562 ), but in fact if we make n a random variable this will have an effect on the resulting distribution , taking it away from lognormal . For example , if n is exponentially distributed , the distribution tends to a Pareto ( Coad , 2010 ; Reed , 2001 ).
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planatory variables , there are still many potential determinants of growth that remain omitted .
The remainder of the paper is set out as follows . Section 2 provides an illustration of the basic intuition of the model , which is presented in mathematical terms in Section 3 . Section 4 investigates one of the implications of the model relating to the distribution of GDP per capita . The implications of the model are discussed in Section 5 , and suggestions for further research are given in Section 6 .
2 . A Thought Experiment
To illustrate the intuition behind
our theoretical model , consider the following thought experiment . Bill Gates wants to start his business in a developing country . The attractiveness of such an endeavor depends on a long list of factors including :
• Efficient public authorities that don ’ t make entry costs too high , don ’ t ask for bribes , and won ’ t expropriate successful businesses
• Reliable supply of electricity , raw materials , and spare parts
• Good transport networks that enable the commuting of employees and the distribution of final output