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A Model of Equilibrium Institutions

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Listed:
  • Bernardo Guimaraes
  • Kevin D. Sheedy

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.

Suggested Citation

  • Bernardo Guimaraes & Kevin D. Sheedy, 2012. "A Model of Equilibrium Institutions," CEP Discussion Papers dp1123, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp1123
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    References listed on IDEAS

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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 21:57:00

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    Cited by:

    1. Leonardo Becchetti & Riccardo Massari & Paolo Naticchioni, 2014. "The drivers of happiness inequality: suggestions for promoting social cohesion," Oxford Economic Papers, Oxford University Press, vol. 66(2), pages 419-442.
    2. Yang, Jidong & Liu, Kai & Zhang, Yiran, 2015. "Happiness Inequality in China," MPRA Paper 66623, University Library of Munich, Germany.
    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. 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.
    5. 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.

    More about this item

    Keywords

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

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • P48 - Economic Systems - - Other Economic Systems - - - Political Economy; Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies

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