When Are Autocracies Economically Efficient?

David Epstein, Columbia University

Peter Rosendorff, University of Southern California

Motivation Politics leads to economically

inefficient outcomes because: Property rights are insecure, so

governments can extract resources Politicians trade rents for political

support via inefficient policies

Motivation Politics leads to economically

inefficient outcomes because: Property rights are insecure, so

governments can extract resources Politicians trade rents for political

support via inefficient policies E.g., Russia both then

SovietState

Motivation Politics leads to economically

inefficient outcomes because: Property rights are insecure, so

governments can extract resources Politicians trade rents for political

support via inefficient policies E.g., Russia both then and now We want to capture both aspects

in a single model

Federal& StateGov’ts

Strategy Use a contest model (a la Hirshleifer) to

capture competition over taxes Government and capital owners choose

resources to devote to contest Tax rate is thus endogenously determined

Politicians care about Political support from different sectors Rents extracted via taxes

See to what degree political institutions, like SOP, can mitigate the inefficiencies generated

Findings Separate powers can economize on

inefficiencies with fixed sharing rules Otherwise, the result can be more inefficient

than it was with just a single autocrat The idea is to turn a common pool resource

problem into one a collective action problem Inefficiencies arise through the mismatch

of political and economic support Source of potentially testable implications

Model Basics Two factors, K and L Two sectors

Non-market technology: Fs(Ls)= Ls

Price =1, so wages =1 Market technology: Fm(Km,Lm)I(TG)

CRT in K and L. TG is the level of public goods provision. I(TG)=1 if TG>Γ

Objectives Workers: Wages=1, so

UL = L Residual R = Fm(Km,Lm)I(TG) – Lm accrues

to K owners. Notice that Km,Lm > 0 iff TG>Γ; then UK(k) = (1-t) R – k if TG>Γ, 0 otherwise. Think of R as relative earnings of capital

Capital Owners UK=(1-t)R-k

Government’s Utility Government cares about political

support and taxes collected UG(g) = UK + (1- )UL + (tR-g)

measures relative weight on capital Can be:

Electoral support Rewards for friends, a la crony capitalism Armed strength or capacity to disrupt via

riots Racial and ethnic factors

Government’s Utility Government cares about political

support and taxes collected UG(g) = UK + (1- )UL + (tR -TG -g)

measures relative weight placed on net rents, relative to political support

Higher values mean a more secure government

g measures the resources that the government spends on contest

TG is government spending on public goods provision.

Tax Rates The equilibrium tax rate is:

Results from a contest between government and capital Actual armed conflict Resource extraction under Nash bargaining Capital can hide assets offshore, at a cost Bureaucrats extract taxes, business lobbies

kggkgt

,

F(K,L)

R=F(K,L)-L

L

L

K

U(L)

U(K)

G

(1-)

t

Economic Sector Political Sector

F(K,L)

R=F(K,L)-L

L

L

K

U(L)

U(K)

G

(1-)

tg, TG

k

Economic Sector Political Sector

Equilibrium Under Autocracy Contest allocations :

1 whenever2

,2

, 22

2

AAA RRka

Only have nonzero allocations if />>1. Degree of political/economic

mismatch: / Secure autocrats are the most

inefficient Expenditures rise with R (and with

K)

Tax Rates

Only depends on political support and preference for net rents

t = ½ when =0; t = 0 when =1 Autocrat is never maximally extractive Marginal benefits of taxing are constant,

while the cost of extraction increases

2AA

AA

kaat

Resource Dissipation

Notice that all the tax revenue collected, less any spent on public goods provision is completely dissipated. There is no surplus in equilibrium.

Dissipation is due to a mismatch between political and economic sources of support If both come from the same sector ,

outcome is (more) efficient – less wasteful.

AAAA DtRkaD

2

Two Branches, Fixed Sharing Two entities, P and C, can each attack

capital now t = (p+c) / (p+c+k)

Assume first that all tax revenue generated is split 50-50

Then: Equilibrium tax rates fall Extraction occurs only if / > πS > 2

Extraction requires an even greater degree of mismatch

Resource dissipation falls as well

Proportional Sharing Tax revenue is shared according to

amount each invests in attacking K P earns t*[p/(p+c)]; C earns t*[c/(p+c)]

Now both tax rates and dissipation rise Why?

Previous equilibrium made interbranch relations into a collective action problem

Now it’s a common pool resource problem So they “overgraze” the taxable sector

Discussion Institutions such as SOP and

federalism can prevent resource dissipation But only with enforceable, predetermined

allocations of tax revenues Otherwise, the “multiple mafias” problem

will make matters worse Politicians will be efficient if:

They are more concerned about their political support than extraction, or

Their political & economic support come from the same sector of society