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Political Instability and Growth in Proprietary Economics

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  • Jody Overland
  • Michael Spaget

Abstract

Developing country leaders typically resemble proprietors more than benevolent social planners, i.e., they are powerful individuals pursuing their own interests while they remain in power. We model growth in a 'proprietary economy" facing each period an endogenous probability of 'political catastrophe" that would hurt foreign investors and extinguish the proprietor's wealth extraction ability. We develop a model in which domestic capital exhibits a bifurcation point determining economic growth or shrink,9,ge. With low initial domestic capital the proprietor plunders the country's resources and the economy shrinks, even when shrinkage is not socially optimal. With high initial domestic capital the economy grows faster than is socially optimal.

Suggested Citation

  • Jody Overland & Michael Spaget, 1998. "Political Instability and Growth in Proprietary Economics," William Davidson Institute Working Papers Series 172, William Davidson Institute at the University of Michigan.
  • Handle: RePEc:wdi:papers:1998-172
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    References listed on IDEAS

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    More about this item

    Keywords

    political economy; growth; propreitary economy; bifurcation; and political catastrophe;

    JEL classification:

    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • H - Public Economics

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