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A model of equilibrium institutions

  • Kevin Sheedy

    (London School of Economics)

  • Bernardo Guimaraes

    (Sao Paulo School of Economics-FGV)

In order to understand inefficient institutions, one needs to understand what might cause the breakdown of a political version of the Coase Theorem. This paper considers an environment populated by ex-ante identical agents and develops a model of power and distribution where institutions (the "rules of the game") are set to maximize payoffs of those individuals in power. They are constrained by the threat of rebellion, where any rebels would be similarly constrained by further threats. Equilibrium institutions are the fixed point of this constrained maximization problem. This model can be applied to dierent economic environments. Private investment depends on credible limitations on expropriation, which can only be achieved if power is not as concentrated as those in power would like it to be, ex-post. Endogenously, this enables the group in power to act as government committed to protection of property rights, which would otherwise be time inconsistent. But the political Coase Theorem does not hold. Since sharing power implies sharing rents, capital taxation is inefficiently high.

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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 49.

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Date of creation: 2011
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Handle: RePEc:red:sed011:49
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