Pampered Bureaucracy, Political Stability, and Trade Integration

42 Pages Posted: 27 Mar 2017

See all articles by Caleb Stroup

Caleb Stroup

Davidson College

Benjamin Zissimos

University of Exeter Business School

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Date Written: March 06, 2017

Abstract

This paper examines the effect of trade integration and comparative advantage on one of a country’s institutions, which in turn influences its economic efficiency. The environment we explore is one in which a country’s lower classes may revolt and appropriate wealth owned by a ruling elite. The elite can avert revolution by incentivizing a potentially productive middle class to sink their human capital into a relatively unproductive bureaucracy. Thus the bureaucracy serves as an institution through which the elite can credibly commit to make transfers to the rest of society, but in the process this reduces economic efficiency. Trade integration alters the relative value of the elite’s wealth. This alters the lower classes’ incentive to revolt on the one hand and the elite’s incentive to subsidize participation in the inefficient bureaucracy on the other. Therefore, the interaction between a country’s comparative advantage and an inefficient economic institution determines whether trade integration increases or reduces economic efficiency. The econometric findings support the model’s main prediction.

Keywords: efficiency, institutions, property rights, social unrest, trade integration

JEL Classification: D300, D740, F100, O120, P140

Suggested Citation

Stroup, Caleb and Zissimos, Benjamin, Pampered Bureaucracy, Political Stability, and Trade Integration (March 06, 2017). CESifo Working Paper Series No. 6371, Available at SSRN: https://ssrn.com/abstract=2941409 or http://dx.doi.org/10.2139/ssrn.2941409

Caleb Stroup

Davidson College ( email )

United States

HOME PAGE: http://sites.google.com/site/calebstroupeconomics

Benjamin Zissimos (Contact Author)

University of Exeter Business School ( email )

Streatham Court
Xfi Building, Rennes Dr.
Exeter, EX4 4JH
United Kingdom

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