Institutional reform, technology adoption and redistribution: a political economy perspective

Abstract

We examine technology adoption and growth in a political economy framework where two alternative mechanisms of redistribution are on the menu of choice for the economy. One of these is a lump-sum transfer given to agents in the economy. The other is in the form of expenditure directed towards institutional reform aimed at bringing about a reduction in the cost of technology adoption in the presence of uncertainty. The choice over these mechanisms is examined under three alternative approaches to collective decision making, namely a voting mechanism, and social planning with a Benthamite and Rawlsian social welfare function respectively. We find that the extent of uncertainty, and initial inequality, working through the political economy mechanism, have a positive impact on long run average wealth levels in the economy in all settings. All economies converge to the same inequality and growth rates in the long run; however, the speed of transition is fastest with the voting mechanism and slowest in the case of social planning with the Rawlsian social welfare function. Transitional inequality is highest in the Rawlsian framework, suggesting that egalitarian objectives in collective decision making do not necessarily correspond to egalitarian outcomes for the economy.