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Institutions, Capital, and Growth
Author(s) -
Hall Joshua C.,
Sobel Russell S.,
Crowley George R.
Publication year - 2010
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.4284/sej.2010.77.2.385
Subject(s) - physical capital , capital deepening , economics , financial capital , human capital , capital accumulation , capital formation , capital consumption allowance , monetary economics , investment (military) , capital intensity , stock (firearms) , capital (architecture) , fixed capital , labour economics , market economy , mechanical engineering , archaeology , politics , political science , law , history , engineering
The international development community has encouraged investment in physical and human capital as a precursor to economic progress. Recent evidence shows, however, that increases in capital do not always lead to increases in output. We develop a growth model where the allocation and productivity of capital depends on a country's institutions. We find that increases in physical and human capital lead to output growth only in countries with good institutions. In countries with bad institutions, increases in capital lead to negative growth rates because additions to the capital stock tend to be employed in rent‐seeking and other socially unproductive activities.