A Model of Equilibrium Institutions

69 Pages Posted: 1 Mar 2012

See all articles by Bernardo Guimarães

Bernardo Guimarães

London School of Economics & Political Science (LSE) - Department of Economics

Kevin Daniel Sheedy

London School of Economics

Date Written: February 2012

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 Classification: E02, O43, P48

Suggested Citation

Guimarães, Bernardo and Sheedy, Kevin Daniel, A Model of Equilibrium Institutions (February 2012). CEPR Discussion Paper No. DP8855, Available at SSRN: https://ssrn.com/abstract=2013848

Bernardo Guimarães (Contact Author)

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 (0)20 7955 7502 (Phone)

HOME PAGE: http://personal.lse.ac.uk/guimarae

Kevin Daniel Sheedy

London School of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 207 107 5022 (Phone)
+44 207 955 6592 (Fax)

HOME PAGE: http://personal.lse.ac.uk/sheedy/

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