Emergence and Persistence of Inefficient States

60 Pages Posted: 4 Dec 2006

See all articles by Daron Acemoglu

Daron Acemoglu

Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Davide Ticchi

Polytechnic University of Marche; affiliation not provided to SSRN; Department of Economics and Social Sciences

Andrea Vindigni

Princeton University - Department of Political Science; Stockholm University - Institute for International Economic Studies (IIES); IZA Institute of Labor Economics

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Date Written: November 30, 2006

Abstract

Inefficiencies in the bureaucratic organization of the state are often viewed as important factors in retarding economic development. Why certain societies choose or end up with such inefficient organizations has received very little attention, however. In this paper, we present a simple theory of the emergence and persistence of inefficient states. The society consists of rich and poor individuals. The rich are initially in power, but expect to transition to democracy, which will choose redistributive policies. Taxation requires the employment of bureaucrats. We show that, under certain circumstances, by choosing an inefficient state structure, the rich may be able to use patronage and capture democratic politics. This enables them to reduce the amount of redistribution and public good provision in democracy. Moreover, the inefficient state creates its own constituency and tends to persist over time. Intuitively, an inefficient state structure creates more rents for bureaucrats than would an efficient state structure. When the poor come to power in democracy, they will reform the structure of the state to make it more efficient so that higher taxes can be collected at lower cost and with lower rents for bureaucrats. Anticipating this, when the society starts out with an inefficient organization of the state, bureaucrats support the rich, who set lower taxes but also provide rents to bureaucrats. We show that in order to generate enough political support, the coalition of the rich and the bureaucrats may not only choose an inefficient organization of the state, but they may further expand the size of bureaucracy so as to gain additional votes. The model shows that an equilibrium with an inefficient state is more likely to arise when there is greater inequality between the rich and the poor, when bureaucratic rents take intermediate values and when individuals are sufficiently forward-looking.

Keywords: bureaucracy, corruption, democracy, patronage politics, political economy, public goods, redistributive politics

JEL Classification: P16, H11, H26, H41

Suggested Citation

Acemoglu, Daron and Ticchi, Davide and Vindigni, Andrea, Emergence and Persistence of Inefficient States (November 30, 2006). MIT Department of Economics Working Paper No. 06-32, Available at SSRN: https://ssrn.com/abstract=948580 or http://dx.doi.org/10.2139/ssrn.948580

Daron Acemoglu (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Davide Ticchi

Polytechnic University of Marche ( email )

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affiliation not provided to SSRN

Department of Economics and Social Sciences ( email )

Piazzale Martelli 8
Ancona, 60121
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Andrea Vindigni

Princeton University - Department of Political Science ( email )

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Stockholm University - Institute for International Economic Studies (IIES) ( email )

Stockholm, SE-10691
Sweden

IZA Institute of Labor Economics

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Germany

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