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A model of equilibrium institutions

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  • Kevin Sheedy

    (London School of Economics)

  • Bernardo Guimaraes

    (Sao Paulo School of Economics-FGV)

Abstract

In order to understand inefficient institutions, one needs to understand what might cause the breakdown of a political version of the Coase Theorem. This paper considers an environment populated by ex-ante identical agents and develops a model of power and distribution where institutions (the "rules of the game") are set to maximize payoffs of those individuals in power. They are constrained by the threat of rebellion, where any rebels would be similarly constrained by further threats. Equilibrium institutions are the fixed point of this constrained maximization problem. This model can be applied to dierent economic environments. Private investment depends on credible limitations on expropriation, which can only be achieved if power is not as concentrated as those in power would like it to be, ex-post. Endogenously, this enables the group in power to act as government committed to protection of property rights, which would otherwise be time inconsistent. But the political Coase Theorem does not hold. Since sharing power implies sharing rents, capital taxation is inefficiently high.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 49.

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Date of creation: 2011
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Handle: RePEc:red:sed011:49

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References

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  1. Levy, Gilat, 2004. "A model of political parties," Journal of Economic Theory, Elsevier, vol. 115(2), pages 250-277, April.
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  18. Ulrike Malmendier, 2009. "Law and Finance "at the Origin"," Journal of Economic Literature, American Economic Association, vol. 47(4), pages 1076-1108, December.
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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
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Cited by:
  1. 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.
  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. Campante, Filipe R. & Do, Quoc-Anh & Guimaraes, Bernardo, 2012. "Isolated Capital Cities and Misgovernance: Theory and Evidence," Working Paper Series rwp12-058, Harvard University, John F. Kennedy School of Government.
  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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