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A Model of Equilibrium Institutions

  • Bernardo Guimaraes
  • Kevin D. Sheedy

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.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1123.

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Date of creation: Feb 2012
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Handle: RePEc:cep:cepdps:dp1123
Contact details of provider: Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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  1. Daron Acemoglu & Simon Johnson, 2005. "Unbundling Institutions," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 949-995, October.
  2. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output per Worker than Others?," NBER Working Papers 6564, National Bureau of Economic Research, Inc.
  3. Daron Acemoglu & James A. Robinson, 2008. "Persistence of Power, Elites, and Institutions," American Economic Review, American Economic Association, vol. 98(1), pages 267-93, March.
  4. repec:cup:cbooks:9780521855266 is not listed on IDEAS
  5. Timothy Besley & Torsten Persson, 2010. "State Capacity, Conflict, and Development," Econometrica, Econometric Society, vol. 78(1), pages 1-34, 01.
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  8. Edward L. Glaeser & Jose Scheinkman & Andrei Shleifer, 2002. "The Injustice of Inequality," Harvard Institute of Economic Research Working Papers 1967, Harvard - Institute of Economic Research.
  9. Acemoglu, Daron, 2003. "Why not a political Coase theorem? Social conflict, commitment, and politics," Journal of Comparative Economics, Elsevier, vol. 31(4), pages 620-652, December.
  10. Hirshleifer, Jack, 1995. "Anarchy and Its Breakdown," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 26-52, February.
  11. Konstantin Sonin & Sergei Guriev, 2008. "Dictators and Oligarchs: A Dynamic Theory of Contested Property Rights," 2008 Meeting Papers 1072, Society for Economic Dynamics.
  12. Besley, Timothy J. & Persson, Torsten, 2007. "The Origins of State Capacity: Property Rights, Taxation, and Politics," CEPR Discussion Papers 6370, C.E.P.R. Discussion Papers.
  13. Catherine Hafer, 2006. "On the Origins of Property Rights: Conflict and Productionin the State of Nature," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 119-143.
  14. Daron Acemoglu & Georgy Egorov & Konstantin Sonin, 2008. "Coalition Formation in Non-Democracies," Review of Economic Studies, Oxford University Press, vol. 75(4), pages 987-1009.
  15. Ray, Debraj, 2007. "A Game-Theoretic Perspective on Coalition Formation," OUP Catalogue, Oxford University Press, number 9780199207954, March.
  16. Myerson, Roger B., 2010. "Capitalist investment and political liberalization," Theoretical Economics, Econometric Society, vol. 5(1), January.
  17. Ulrike Malmendier, 2009. "Law and Finance "at the Origin"," Journal of Economic Literature, American Economic Association, vol. 47(4), pages 1076-1108, December.
  18. Grossman, Herschel I & Kim, Minseong, 1995. "Swords or Plowshares? A Theory of the Security of Claims to Property," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1275-88, December.
  19. Timothy Besley & Torsten Persson, 2009. "Repression or civil war?," LSE Research Online Documents on Economics 33748, London School of Economics and Political Science, LSE Library.
  20. Daron Acemoglu, 2007. "Oligarchic Versus Democratic Societies," Carlo Alberto Notebooks 47, Collegio Carlo Alberto.
  21. Anthony Downs, 1957. "An Economic Theory of Political Action in a Democracy," Journal of Political Economy, University of Chicago Press, vol. 65, pages 135.
  22. Razin, Ronny & Piccione, Michele, 2009. "Coalition formation under power relations," Theoretical Economics, Econometric Society, vol. 4(1), March.
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