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Political Predation and Economic Development

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  • Azam, Jean-Paul
  • Bates, Robert H
  • Biais, Bruno

Abstract

Economic growth occurs as resources are reallocated from the traditional sector to the more productive modern sector. Yet, the latter is more vulnerable to political predation. Hence, political risk hinders development. We analyse a politico-economic game between citizens and governments, whose type (benevolent or predatory) is unknown to the citizens. In equilibrium, opportunistic governments mix between predation and restraint. As long as restraint is observed, political expectations improve and the economy grows. Once there is predation, the reputation of the current government is ruined and the economy collapses. If citizens are unable to overthrow this government, the collapse is durable. Otherwise, a new government is drawn and the economy can rebound. Equilibrium dynamics are characterized as a Markov chain. Consistent with stylized facts, equilibrium political and economic histories are random, unstable and exhibit long-term divergence. Our theoretical model also generates new empirical implications on the joint dynamics of income inequality, output and political variables.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5062.

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Date of creation: May 2005
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Handle: RePEc:cpr:ceprdp:5062

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Keywords: Economic Development; Political Economy; political predation; reputation;

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Cited by:
  1. Timothy Besley & Masayuki Kudamatsu, 2007. "Making Autocracy Work," STICERD - Development Economics Papers - From 2008 this series has been superseded by Economic Organisation and Public Policy Discussion Papers 48, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  2. Goriaev, Alexei P. & Sonin, Konstantin, 2005. "Is Political Risk Company-Specific? The Market Side of the Yukos Affair," CEPR Discussion Papers 5076, C.E.P.R. Discussion Papers.
  3. Patrick Honohan & Thorsten Beck, 2007. "Making Finance Work for Africa," World Bank Publications, The World Bank, number 6626, October.
  4. Ramin Dadasov & Philipp Harms & Oliver Lorz, 2010. "Financial Integration in Autocracies: Greasing the Wheel or More to Steal?," MAGKS Papers on Economics 201014, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  5. Toledo, Arcelia & Hernández, José de la Paz & Griffin, Denis, 2010. "Incentives and the growth of Oaxacan subsistence businesses," Journal of Business Research, Elsevier, vol. 63(6), pages 630-638, June.

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