The Dynamic Reform of Political Institutions

This paper formulates a model of dynamic, endogenous reform of political institutions. Specifically, a class of dynamic political games (DPGs) is introduced in which institutional choice is both recursive and instrumental. It is recursive because future political institutions are decided under current ones. The process is instrumental because institutional choices do not affect payoffs or technology directly. DPGs provide a broad framework to address the question: which environments exhibit institutional reform? Which tend toward institutional stability? In any state, private (public) sector decisions are essential if, roughly, they cannot always be replaced by decisions in the public (private) sector. We prove that institutional reform occurs if public sector decisions are not essential. Conversely, private sector decisions are essential if institutional reform occurs. The results suggest that a relatively more effective public sector is conducive to institutional stability, while a more effective private sector is conducive to change. We also show that if the political rules satisfy a dynamic consistency property, then the game admits ``political fixed points" of a recursive map from future (state-contingent) decisions rules to current ones. Since existence of political fixed points is a necessary condition of equilibrium, we apply the result to prove two equilibrium existence theorems, one of which implies that private and public sector decision rules that are smooth functions of the economic state.