Political competition in dynamic economies

How does economic opportunity – the set of possible investments in an economy – shape politics, and politics shape investment? We argue that in a world where money is power, political leaders will intervene in the economy if investment returns shift power and threaten their position. Anticipation of such action induces a bias towards investments which vary less and co-vary with the investments of the regime. Leaders will then weigh losses from such intervention and biased allocation, which depends on possible investments’ risk and covariance, with the costs of a larger and less vulnerable coalition. We provide causal evidence of this process using the steamship revolution in transport which radically altered economic opportunity in the 19th century. We show that not only do large coalition regimes (e.g. democracies) have an inherent investment edge in high-risk projects, such as new technology and international trade, but that they are more likely to emerge if that is where economic opportunities are.