Department of Economics

In economic development, institutions and organizations are critical elements which can be looked upon as rules and players of a game, respectively. Investigating how institutions evolve and why certain organizations emerge may help us better understand economic development, especially when the situation requires an efficient solution. The problem of sovereign financing shares the features of one-sided Prisoner’ s Dilemma (PD). Sovereign default had been a common phenomenon in England since the medieval period; however, the establishment of the Bank of England altered the sovereign’ s incentives and helped build mutual trust between the crown and Parliament. In this paper, we analyze the emergence of the Bank by viewing it as a commitment device which makes the king’ s promise to pay trustworthy.