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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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File URL: http://eprints.lse.ac.uk/42017/
File Function: Open access version.
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 42017.

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Length: 69 pages
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:ehl:lserod:42017
Contact details of provider: Postal: LSE Library Portugal Street London, WC2A 2HD, U.K.
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Web page: http://www.lse.ac.uk/

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  1. Razin, Ronny & Piccione, Michele, 2009. "Coalition formation under power relations," Theoretical Economics, Econometric Society, vol. 4(1), March.
  2. Timothy Besley & Torsten Persson, 2009. "State Capacity, Conflict and Development," STICERD - Economic Organisation and Public Policy Discussion Papers Series 010, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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  4. Levy, Gilat, 2004. "A model of political parties," Journal of Economic Theory, Elsevier, vol. 115(2), pages 250-277, April.
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  8. Timothy Besley & Torsten Persson, 2007. "The Origins of State Capacity: Property Rights, Taxation, and Politics," NBER Working Papers 13028, National Bureau of Economic Research, Inc.
  9. Daron Acemoglu, 2002. "Why Not a Political Coase Theorem? Social Conflict, Commitment and Politics," NBER Working Papers 9377, National Bureau of Economic Research, Inc.
  10. 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.
  11. Ray, Debraj, 2007. "A Game-Theoretic Perspective on Coalition Formation," OUP Catalogue, Oxford University Press, number 9780199207954, March.
  12. Daron Acemoglu, 2007. "Oligarchic Versus Democratic Societies," Carlo Alberto Notebooks 47, Collegio Carlo Alberto.
  13. 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.
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  15. Garfinkel, Michelle R. & Skaperdas, Stergios, 2007. "Economics of Conflict: An Overview," Handbook of Defense Economics, Elsevier.
  16. Acemoglu, Daron & Robinson, James A, 2006. "Persistence of Power, Elites and Institutions," CEPR Discussion Papers 5603, C.E.P.R. Discussion Papers.
  17. repec:cup:cbooks:9780521855266 is not listed on IDEAS
  18. 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.
  19. Myerson, Roger B., 2010. "Capitalist investment and political liberalization," Theoretical Economics, Econometric Society, vol. 5(1), January.
  20. 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.
  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. Hirshleifer, Jack, 1995. "Anarchy and Its Breakdown," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 26-52, February.
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