Institutional dynamics under revenue volatility and revenue-dependent lobbying power: A stochastic differential game approach

We propose an analysis of institutional dynamics under uncertainty by the means of a stochastic differential lobbying game with two main ingredients. The first one is uncertainty inherent in the institutional process itself. The second one has to do with the crucial role of resource windfalls in economic and political outcomes, shaping lobbying power and adding a second source of uncertainty. First, we focus on uncertainty surrounding the institutional process only and show that its main consequence is the existence of multiple equilibria with very distinct features: symmetric equilibria which lead the economy to reach almost surely a stable pointwise institutional steady state in the long run even in the absence of the retaliation motive put forward by the deterministic lobbying literature, and asymmetric equilibria which only show up under uncertainty and do no allow for stochastic convergence to a steady state. Second, when accounting for the two sources of uncertainty together with resource revenue-dependent lobbying power, we show that revenue volatility tends to stabilize institutional dynamics compared to the deterministic counterpart.