Question 1 Suppose there is an entrepreneur who wishes to invest in country A. The rules and regulations on related to investments in this country are confusing and unclear. Every time an amount 'i' is invested the entrepreneur gets a return of 4i. However, the entrepreneur has to spend 10% of the return on obtaining licenses and permits for her business (perhaps by paying bribes). That is she only gets to keep 90% of the return from the investment. 1. Remember we used the term 'corruption tax' for the 10% that the entrepreneur is spending. Apart from bribes can you think of what other kind of diversions might go into this 10%? 2. Given this scenario what is the level of investment that the entrepreneur will make? Clearly show your reasoning. 3. If the entrepreneur did get to keep all of the return, what would be the investment that she would make? 4. If A is a Solow type economy with exogenous technological change then what is the impact of poor institutions (the fact that 10% of the return leaks away from the 'business') on the level of per capita output in the country? What about long term growth (Hint: Recall what the impact of increasing or decreasing investment is in the Solow model) Page 1 / 2 +