Working Paper: CEPR ID: DP5062
Authors: Jean-Paul Azam; Robert H. Bates; Bruno Biais
Abstract: Economic growth occurs as resources are reallocated from the traditional sector to the more productive modern sector. Yet, the latter is more vulnerable to political predation. Hence, political risk hinders development. We analyse a politico-economic game between citizens and governments, whose type (benevolent or predatory) is unknown to the citizens. In equilibrium, opportunistic governments mix between predation and restraint. As long as restraint is observed, political expectations improve and the economy grows. Once there is predation, the reputation of the current government is ruined and the economy collapses. If citizens are unable to overthrow this government, the collapse is durable. Otherwise, a new government is drawn and the economy can rebound. Equilibrium dynamics are characterized as a Markov chain. Consistent with stylized facts, equilibrium political and economic histories are random, unstable and exhibit long-term divergence. Our theoretical model also generates new empirical implications on the joint dynamics of income inequality, output and political variables.
Keywords: economic development; political economy; political predation; reputation
JEL Codes: D82; H11; O00; O17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government behavior (predation) (H13) | economic collapse (F65) |
| government behavior (predation) (H13) | citizens' withdrawal from modern sector (L52) |
| citizens' assessment of political risk (F52) | willingness to enter modern sector (O17) |
| willingness to enter modern sector (O17) | economic growth (O49) |
| government behavior (restraint) (H10) | political optimism (P27) |
| political optimism (P27) | economic growth (O49) |
| government behavior (predation) (H13) | citizens' assessment of political risk (F52) |