ABSTRACT
This chapter examines various political systems that produce the formal institutions. Governing bodies themselves can become factions that destabilize an economy. There is a tension among governing bodies either to nurture economies to grow by facilitating exchange or to confiscate assets and wealth outright. In a general sense the first scenario is referred to as the contract theory, and the second, as the predatory theory. There are an infinite number of possible political systems. The chapter explores only three of these: a state that consists of a single sovereign ruler, a political system ruled by a single congressional body, and a federalist system. The primary economic role of the state is to create an institutional environment that facilitates exchange and creates dynamic incentives for growth. Corruption directly undermines that role by diminishing the credibility of the state and by weakening the legitimacy of the formal rules imposed by the government.
