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A Model of Equilibrium Institutions

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  • Guimarães, Bernardo
  • Sheedy, Kevin D.

Abstract

Institutions that serve the interests of an elite are often cited as an important reason for poor economic performance. This paper builds a model of institutions that allocate resources and power to maximize the payoff of an elite, but where any group that exerts sufficient fighting effort can launch a rebellion that destroys the existing institutions. The rebels are then able to establish new institutions as a new elite, which will similarly face threats of rebellion. The paper analyses the economic consequences of the institutions that emerge as the equilibrium of this struggle for power. High levels of economic activity depend on protecting private property from expropriation, but the model predicts this can only be achieved if power is not as concentrated as the elite would like it to be, ex post. Power sharing endogenously enables the elite to act as a government committed to property rights, which would otherwise be time inconsistent. But sharing power entails sharing rents, so in equilibrium power is too concentrated, leading to inefficiently low investment.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8855.

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Date of creation: Feb 2012
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Handle: RePEc:cpr:ceprdp:8855

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Keywords: institutions; political economy; power struggle; property rights; time inconsistency;

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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. How thieving elites can prevent rebellions
    by Economic Logician in Economic Logic on 2012-03-01 15:57:00
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. Campante, Filipe & Do, Quoc-Anh & Guimarães, Bernardo, 2013. "Isolated Capital Cities and Misgovernance: Theory and Evidence," CEPR Discussion Papers 9284, C.E.P.R. Discussion Papers.
  2. Leonardo Becchetti & Riccardo Massari & Paolo Naticchioni, 2011. "The drivers of happiness inequality: Suggestions for promoting social cohesion," Working Papers 2011-06, Universita' di Cassino, Dipartimento di Scienze Economiche.
  3. Tim Willems & Shaun Larcom & Mare Sarr, 2013. "What shall we do with the bad dictator?," Economics Series Working Papers 671, University of Oxford, Department of Economics.
  4. Leonardo Becchetti & Riccardo Massari & Paolo Naticchioni, 2010. "Why has happiness inequality increased? Suggestions for promoting social cohesion," Working Papers 177, ECINEQ, Society for the Study of Economic Inequality.

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