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A model of equilibrium institutions

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  • Guimaraes, Bernardo
  • Sheedy, Kevin D.

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

  • Guimaraes, Bernardo & Sheedy, Kevin D., 2012. "A model of equilibrium institutions," LSE Research Online Documents on Economics 42017, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:42017
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    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:

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    3. Jidong Yang & Kai Liu & Yiran Zhang, 2019. "Happiness Inequality in China," Journal of Happiness Studies, Springer, vol. 20(8), pages 2747-2771, December.
    4. Yang, Jidong & Liu, Kai & Zhang, Yiran, 2015. "Happiness Inequality in China," MPRA Paper 66623, University Library of Munich, Germany.
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    6. 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.
    7. Johan Graafland & Bjorn Lous, 2019. "Income Inequality, Life Satisfaction Inequality and Trust: A Cross Country Panel Analysis," Journal of Happiness Studies, Springer, vol. 20(6), pages 1717-1737, August.
    8. Lous, Bjorn, 2020. "On free markets, income inequality, happiness and trust," Other publications TiSEM e2480eed-722b-4e2a-8e29-4, Tilburg University, School of Economics and Management.
    9. Bjorn Lous & Johan Graafland, 2022. "Who Becomes Unhappy when Income Inequality Increases?," Applied Research in Quality of Life, Springer;International Society for Quality-of-Life Studies, vol. 17(1), pages 299-316, February.
    10. 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.
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    More about this item

    Keywords

    institutions; political economy; power struggle; property rights; time inconsistency;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • P48 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies

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