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A model of equilibrium institutions

Author

Listed:
  • Kevin Sheedy

    (London School of Economics)

  • Bernardo Guimaraes

    (Sao Paulo School of Economics-FGV)

Abstract

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.

Suggested Citation

  • Kevin Sheedy & Bernardo Guimaraes, 2011. "A model of equilibrium institutions," 2011 Meeting Papers 49, Society for Economic Dynamics.
  • Handle: RePEc:red:sed011:49
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    File URL: https://economicdynamics.org/meetpapers/2011/paper_49.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Leonardo Becchetti & Riccardo Massari & Paolo Naticchioni, 2014. "The drivers of happiness inequality: suggestions for promoting social cohesion," Oxford Economic Papers, Oxford University Press, vol. 66(2), pages 419-442.
    2. Yang, Jidong & Liu, Kai & Zhang, Yiran, 2015. "Happiness Inequality in China," MPRA Paper 66623, University Library of Munich, Germany.
    3. 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.
    4. Tim Willems & Shaun Larcom & Mare Sarr, 2013. "What shall we do with the bad dictator?," Economics Series Working Papers 671, University of Oxford, Department of Economics.
    5. 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.

    More about this item

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • P48 - Economic Systems - - Other Economic Systems - - - Political Economy; Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies

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