11 be no less important. The Ghanaian women farmers who cannot adequately fallow their land, leading to losses in its productivity, are similarly not suffering from poverty combined with missing markets. The channel here is an inequality in power, when effective property rights are power-dependent. What all three situations have in common is that differences in wealth, power or status generate unequal opportunities for productive investment. In all cases, these inequalities cause society to remain shy of the Pareto frontier.

A concern with these mechanisms is particularly justified because of the evidence that unequal productive opportunities persist across generations, over long periods of time. The World Development Report 2006 highlights two broad mechanisms through which inequalities are reproduced – leading to what it calls _inequality traps_ . One is the simple fact that many of an adult’s outcomes (such as his education and wealth levels, or where he lives) will be his children’s pre-determined circumstances. If the child’s outcomes are affected by the circumstances, the ingredients for intergenerational persistence are present. And in fact, a growing literature on intergenerational mobility (or the lack thereof) has documented the impact of parental background on achievement, and the degree of transmission of status across generations. In the US, Mazumder (2005) finds an intergenerational earnings elasticity of 0.6, implying that a family currently earning half the national average income can expect to take five generations to reach the average.<sup>11</sup> Estimates for developing countries are few and far between, but can be even higher. Dunn (2003) estimated an elasticity of 0.69 for Brazil.

The second mechanism for the persistence of inequalities is institutional endogeneity. Since Douglas North and Oliver Williamson modern economists have understood that the manner in which individuals and firms interact in markets is conditioned by the nature of non-market institutions – formal and informal rules and norms of behavior, and the agencies that enforce them. Among the most important roles of these non-market institutions are the definition and enforcement of property rights and contracts. People will not invest if property rights are not well defined and enforced, or if they believe that the contracts they write will not be honored. The state must also provide a whole set of other inputs apart from social order and fair contract enforcement. These include various types of public services and regulations. Lying behind well-functioning markets are legal systems, judges, policemen, and, ultimately, social groups and politicians.

But institutions, like policies, are not designed by a benevolent dictator. They evolve over time in response to the actions of individuals and groups who seek to protect their own interests. It follows that institutions – again just like policies – need not be optimal from a social viewpoint. It is perfectly possible that the institutions that are best-suited to the short-term interests of a particular group in a particular generation are not those most conducive to broad-based economic growth and development. If that particular group

> 11 Mazumder’s estimate is considerably higher than previous estimates (of around 0.4). See, e.g. Solon (1992). The difference arises mainly from the author’s use of a long-term social security earnings history of fathers and children, which allows him to reduce the variance of the transitory component of incomes inherent in previous measures of father’s economic status, usually drawn from the Panel Study of Income Dynamics (PSID) or from the National Longitudinal Surveys (NLS).