On Institutions and Growth∗

A main development in growth economics in the recent years, has been to point at the fundamental role of institutions in the growth process, although few studies have led so far to precise policy recommendations beyond the general claims about the importance of property right enforcement. This is largely due to the difficulty in de&ning the term institutions. North and Thomas (1973) developed the notion that social infrastructure reduces uncertainty and diminishes transaction costs. This idea has been adopted by growth theorists in many different guises. Some authors have emphasized the importance of property right protection and its impact on entrepreneurship; others have concentrated on regulatory institutions in either &nancial, labor, or product markets; yet others have highlighted the importance of social insurance and con! ict management. In this chapter, we use the Aghion-Howitt model of growth with qualityimproving innovations, to look at some speci&c aspects of the relationship between institutions, institutional change, and productivity growth. The &rst section is devoted to the relationship between &nancial development and convergence, and argues that &nancial development is a main determinant of a country s ability to converge in growth rates and/or in levels of GDP per capita towards the technological frontier. The following section looks at the relationship between productivity growth and product market competition. It spells out the con! icting impacts that competition can have on innovation, and discusses the empirical evidence on this issue. The last section develops the notion of appropriate institutions, showing how different types of institutions or policies maximize growth at different stages of technological development.