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Capitalist investment and political liberalization

Author

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  • Myerson, Roger B.

    () (Department of Economics, University of Chicago)

Abstract

We consider a simple political-economic model where capitalist investment is constrained by the government's temptation to expropriate. Political liberalization can relax this constraint, increasing the government's revenue, but also increasing the ruler's political risks. We analyze the ruler's optimal liberalization, where our measure of political liberalization is the probability of the ruler being replaced if he tried to expropriate private investments. Poorer endowments can support reputational equilibria with more investment, even without liberalization. So we find a resources curse, where larger resource endowments can decrease investment and reduce the ruler's revenue. The ruler's incentive to liberalize can be greatest with intermediate resource endowments. Strong liberalization becomes optimal in cases where capital investment yields approximately constant returns to scale. Adding independent revenue decreases optimal liberalization and investment. Mobility of productive factors that complement capital can increase incentives to liberalize, but equilibrium prices may adjust so that liberal and authoritarian regimes co-exist.

Suggested Citation

  • Myerson, Roger B., 2010. "Capitalist investment and political liberalization," Theoretical Economics, Econometric Society, vol. 5(1), January.
  • Handle: RePEc:the:publsh:570
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    Cited by:

    1. Ramin Dadasov & Philipp Harms & Oliver Lorz, 2013. "Financial integration in autocracies: Greasing the wheel or more to steal?," Economics of Governance, Springer, vol. 14(1), pages 1-22, February.
    2. Kevin Sheedy & Bernardo Guimaraes, 2011. "A model of equilibrium institutions," 2011 Meeting Papers 49, Society for Economic Dynamics.

    More about this item

    Keywords

    Political liberalization; resources curse; expropriation risk;

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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