When should market-supporting institutions be established?

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Abstract
Market-supporting institutions play an essential role in successful market economies, yet much remains unanswered about when in the course of economic development those institutions should be established. This article develops a model that shows how private sector growth can depend on the time at which a country establishes institutions belonging to a specific category: those that have the potential not only to enhance efficiency, but to threaten private property rights by facilitating income redistribution (e.g., agencies to enforce regulations and tax laws). If a country has no difficulty committing to secure property rights, it is efficient to establish potentially efficiency-enhancing institutions as soon as possible. In the presence of commitment problems, however, eventually desirable institutions (even those essential for economic growth) can derail growth if established prematurely. Restricting voting rights may have positive or negative effects on growth, and there exist potential complementarities between democracy and efficiency-enhancing institutions.

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