20 Pages Posted: 25 Sep 2017 Last revised: 12 Oct 2017
Date Written: October 1, 2017
The problem of credible commitment dogs every government, whether democratic or authoritarian. Governments that have sufficient power to begin a project can often change their minds. Paradoxically, such omnipotence can be crippling. If lenders cannot be assured that a current mayor’s successors will repay loans, then they may charge him or her extortionate interest rates. If homebuyers suspect that a mayor’s touted plans to improve the schools, police, the environment, or any other long-term project, will be abandoned by his or her successor, then they will discount their bids on the city’s land, reducing the capitalization of good government and discouraging the current mayor from even attempting such long-term improvements in the first place.
Authoritarian bureaucracies face special credible commitment problems. Fear that local officials will build up a local power base has historically induced the leadership of China, imperial and Communist alike, to transfer local officials among subnational jurisdictions frequently. Such frequent transfers undermine those officials’ capacity to make the credible commitments that officials with more stable tenure can make with ease. Moreover, authoritarian regimes discourage the development of independent institutions like investor-owned banks or locally elected legislatures that are independent from local executive officials and that might otherwise act as monitors and enforcers of long-term commitments.
We describe how these problems of credible commitment posed by China’s cadre transfer policy and, more generally, the CCP’s distrust of divided power lead to excessive municipal debt in China. We also propose three new institutional solutions for resolving the credible commitment problem of China’s authoritarian regime. In the end, we conclude that there is no magical solution that can reassure stakeholders such as lenders or home-buyers that an autocratic mayor will follow through on his or her promises. All of our proposed solutions, however, trade on the intuition that even modest institutional limits on power, compatible with China’s one-party system, of democratic centralism, can mitigate the problem of powerlessness ironically created by authoritarian power.
Keywords: Local Government Law; Federalism; Credible Commitment; Authoritarian Constitutions; Chinese Law
JEL Classification: H1, K39
Suggested Citation: Suggested Citation
Hills, Jr., Roderick M. and Qiao, Shitong, Binding Leviathan: Credible Commitment in an Authoritarian Regime (October 1, 2017). NYU Law and Economics Research Paper No. 17-38; University of Hong Kong Faculty of Law Research Paper No. 2017/027. Available at SSRN: https://ssrn.com/abstract=3041692