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A Model of Equilibrium Institutions

  • Guimarães, Bernardo
  • Sheedy, Kevin D.

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 C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8855.

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Date of creation: Feb 2012
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Handle: RePEc:cpr:ceprdp:8855
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  1. Glaeser, Edward & Scheinkman, Jose & Shleifer, Andrei, 2003. "The injustice of inequality," Journal of Monetary Economics, Elsevier, vol. 50(1), pages 199-222, January.
  2. 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. Daron Acemoglu, 2008. "Oligarchic Versus Democratic Societies," Journal of the European Economic Association, MIT Press, vol. 6(1), pages 1-44, 03.
  9. Garfinkel, Michelle R. & Skaperdas, Stergios, 2007. "Economics of Conflict: An Overview," Handbook of Defense Economics, Elsevier.
  10. Daron Acemoglu, 2002. "Why Not a Political Coase Theorem? Social Conflict, Commitment and Politics," NBER Working Papers 9377, National Bureau of Economic Research, Inc.
  11. Timothy Besley & Torsten Persson, 2009. "Repression or Civil War?," American Economic Review, American Economic Association, vol. 99(2), pages 292-97, May.
  12. Razin, Ronny & Piccione, Michele, 2009. "Coalition formation under power relations," Theoretical Economics, Econometric Society, vol. 4(1), March.
  13. 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.
  14. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output Per Worker Than Others?," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 83-116, February.
  15. Anthony Downs, 1957. "An Economic Theory of Political Action in a Democracy," Journal of Political Economy, University of Chicago Press, vol. 65, pages 135.
  16. Ray, Debraj, 2007. "A Game-Theoretic Perspective on Coalition Formation," OUP Catalogue, Oxford University Press, number 9780199207954, March.
  17. Daron Acemoglu & James A. Robinson, 2006. "Persistence of Power, Elites and Institutions," NBER Working Papers 12108, National Bureau of Economic Research, Inc.
  18. Hirshleifer, Jack, 1995. "Anarchy and Its Breakdown," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 26-52, February.
  19. Ulrike Malmendier, 2009. "Law and Finance "at the Origin"," Journal of Economic Literature, American Economic Association, vol. 47(4), pages 1076-1108, December.
  20. repec:cup:cbooks:9780521855266 is not listed on IDEAS
  21. 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.
  22. Myerson, Roger B., 2010. "Capitalist investment and political liberalization," Theoretical Economics, Econometric Society, vol. 5(1), January.
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