Institutions' Complementarity and Coevolution

Abstract

I sketch a framework of theoretical and empirical models to illustrate the interactions between government and market actors, and the resulting coevolution of related institutions. The choices and interactions of the rational actors, in addition to other stock variables, format the motivation matrix and determine the changes in economic outcomes and institutions. The changes accumulating over time reshape the institutional environment in subsequent periods. The empirical findings suggest that state variables, government policies and choices can generate virtuous or vicious spirals driving changes in institutions and the wellbeing of people for a long period of time. Understanding the mechanism is essential for building appropriate institutions and capacity to generate inclusive and sustained economic growth.