Institutions Quality and Growth

We analyze the dynamic interaction between civil society organizations and Government in a representative developing economy. Government favors corruption and so fails to build efficient institutions. On its side, civil society exerts pressure on Government to constrain it to halt corruption. We distinguish between an authoritarian Government and an unrestrictive one: the latter does not repress society’s protests while the former implements punishment mechanisms. We demonstrate analytically the existence of a unique stable equilibrium by solving a linear quadratic differential game for three Regimes respectively the optimal control problem, noncooperative and cooperative games. Numerical assessment indicates that civil monitoring always increases as corruption increases, but civil monitoring is low and institutions improve much faster under cooperation. Furthermore, total factor Productivity effects always dominate the detrimental effect of civil monitoring on growth in the first regime, under some restrictions in the second and never in the third. In response to a change in the government’s aversion to rent variations in the presence of authoritarian government, total factor productivity effects always dominate under both the noncooperative and cooperative scenario. Electronic address: [email protected]. We gratefully acknowledge financial support of the Belgian research program, PAI P6/07 Economic Policy and Finance in the Global Equilibrium Analysis and Social Evaluation. We also acknowledge Raouf Boucekkine for helpful discussions and comments.