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CEP Discussion Paper
A Model of Equilibrium Institutions
Bernardo Guimaraes and Kevin D. Sheedy
February 2012
Paper No' CEPDP1123:
Full Paper (pdf)

JEL Classification: E02; O43; P48

Tags: institutions; political economy; power struggle; property rights; time inconsistency

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.

This paper has been published as:
'Guarding the Guardians', Bernardo Guimaraes and Kevin Sheedy, The Economic Journal, Volume 127, November 2017