Development Economics
Explainer
Why institutions drive long-run growth
Two neighbouring regions, same geography, wildly different incomes. Why?
Quick check · tap an answer to continue
Lesson notes
Key points
- Economists define institutions as the rules of the game: laws, property rights and norms that shape economic incentives.
- Inclusive institutions protect property and open markets to many, while extractive ones channel wealth to a narrow elite.
- Secure rights raise the expected return on investment, so people save, build firms and adopt technology, raising productivity.
- Acemoglu, Johnson and Robinson argue colonial settlement patterns shaped institutions that still explain income gaps today.
Definitions
- Institutions
- The humanly devised rules, formal and informal, that structure economic, political and social interaction (North).
Takeaway: Institutions shape incentives; incentives shape long-run growth.
Quick check: How do secure property rights promote growth?
- They fix prices by law
- They raise expected returns
- They remove all taxes
InstitutionsInclusive vs extractiveIncentive mechanismColonial origins
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