Risk, Institutions and Growth:Why England and Not China?

We analyze the role of risk-sharing institutions in transitions to modern economies.Transitions requires individual-level risk-taking in pursuing productivity-enhancing activitiesincluding using and developing new knowledge. Individual-level, idiosyncratic risk implies thatdistinct risk-sharing institutions – even those providing the same level of insurance – can leadto different growth trajectories if they differently motivate risk-taking. Historically, risk sharinginstitutions were selected based on their cultural and institutional compatibility and not theirunforeseen growth implications. We simulate our growth model incorporating England’s andChina’s distinct pre-modern risk-sharing institutions. The model predicts a transition inEngland and not China even with equal levels of risk sharing. Under the clan-based Chineseinstitution, the relatively risk-averse elders had more control over technological choicesimplying lower risk-taking. Focusing on non-market institutions expands on previous growththeoreticmodels to highlight that transitions can transpire even in the absence of exogenousproductivity shocks or time-dependent state variables. Recognizing the role of non-marketinstitutions in the growth process bridges the view that transitions are due to luck and theview that transitions are inevitable. Transitions transpire when ‘luck’ creates the conditionsunder which economic agents find it beneficial to make the choices leading to positive ratesof technological change. Luck came in the form of historical processes leading to risk-sharinginstitutions whose unintended consequences encouraged productivity-enhancing risk-taking....