Working Paper: CEPR ID: DP8855
Authors: Bernardo Guimaraes; Kevin D. Sheedy
Abstract: 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.
Keywords: institutions; political economy; power struggle; property rights; time inconsistency
JEL Codes: E02; O43; P48
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| elite power (Y60) | institutional design (D02) |
| institutional design (D02) | concentration of power (D30) |
| concentration of power (D30) | inefficient economic outcomes (D61) |
| elite power (Y60) | concentration of power (D30) |
| institutional design (D02) | inefficient economic outcomes (D61) |
| power sharing (D72) | efficient economic outcomes (D61) |
| concentration of power (D30) | inadequate protection of property rights (P14) |
| inadequate protection of property rights (P14) | low investment levels (G31) |
| low investment levels (G31) | economic stagnation (P27) |