Inefficient Economic Institutions by Tatiana Mirutenko

Economic institutions are important because they influence the structure of economic incentives in society and key economic actors in society. Economic institutions are important because they help allocate resources to their most efficient uses, determine who gets profits, revenues and residual rights of control. Corruption in different countries then comes down to who has the best and worst economic institutions, since they determine how efficiently resources are distributed. Well the question then becomes who determines the type of institution? Since different economic institutions lead to different distribution of resources there is always a conflict of interest. The prevailing economic institution is dependent on the political power of the interest groups, not necessarily the most efficient institution. Not only is there tension between conflicting interests in regards to economic institutions, but also the distribution of resources, which is too controlled by the political powers. In this perspective it can thus be seen that since the economic institutions are chosen by political power, and not by the model that exhibits the most efficient allocation of aggregate resources, the underlying incentives that drive these institutions are flawed from inception. The initial incentive to create economic institutions are for the purpose stated above, however, once people come together to make a decision that influences them adversely they chose to advocate their political incentives rather than align with the cause.

http://economics.mit.edu/files/4469