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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 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
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  17. repec:oup:qjecon:v:114:y:1999:i:1:p:83-116 is not listed on IDEAS
  18. Daron Acemoglu, 2008. "Oligarchic Versus Democratic Societies," Journal of the European Economic Association, MIT Press, vol. 6(1), pages 1-44, 03.
  19. Ray, Debraj, 2007. "A Game-Theoretic Perspective on Coalition Formation," OUP Catalogue, Oxford University Press, number 9780199207954, July.
  20. Myerson, Roger B., 2010. "Capitalist investment and political liberalization," Theoretical Economics, Econometric Society, vol. 5(1), January.
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  22. 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.
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