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A model of equilibrium institutions

Guimaraes, Bernardo and Sheedy, Kevin D. (2012) A model of equilibrium institutions. CEP discussion paper, no. 1123. London School of Economics and Political Science, London, UK.

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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.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk/
Additional Information: © 2012 The Authors
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: E - Macroeconomics and Monetary Economics > E0 - General
O - Economic Development, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity
P - Economic Systems > P4 - Other Economic Systems > P48 - Political Economy; Legal Institutions; Property Rights
Sets: Departments > Economics
Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: no. 1123
Date Deposited: 23 Feb 2012 14:55
URL: http://eprints.lse.ac.uk/42017/

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