Working Paper: NBER ID: w19734
Authors: Daniel Diermeier; Georgy Egorov; Konstantin Sonin
Abstract: It is often argued that additional checks and balances provide economic agents with better protection from expropriation of their wealth or productive capital. We demonstrate that in a dynamic political economy model this intuition may be flawed. Surprisingly, increasing the number of veto players or the majority requirement for redistribution may reduce property right protection on the equilibrium path. The reason is the existence of two distinct mechanisms of property rights protection. One are formal constraints that allow individuals or groups to block any redistribution which is not in their favor. The other occurs in equilibrium where agents without such powers protect each other from redistribution. Players without formal blocking power anticipate that the expropriation of other similar players will ultimately hurt them and thus combine their influence to prevent redistributions. Yet, such incentives can be undermined by adding formal constraints. The flip-side of this effect is that individual investment efforts might require coordination. The model also predicts that the distribution of wealth in societies with weaker formal institutions (smaller supermajority requirements) among players without veto power will tend to be more homogenous.
Keywords: property rights; checks and balances; political economy; veto players; redistribution
JEL Codes: D72; D74; P48
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increasing the number of veto players (D72) | reduce property rights protection (P14) |
| increasing supermajority requirements (D72) | reduce property rights protection (P14) |
| addition of formal veto powers (D72) | disrupt coalitions (D74) |
| weaker formal institutions (O17) | more homogeneous wealth distributions (D39) |
| agents without veto power (D72) | less likely to protect each other's rights (P14) |
| addition of a veto player (D72) | destabilize existing equilibria (D59) |
| introduction of additional formal constraints (Y20) | undermine informal mechanisms (O17) |