Role of Social Conflict Theory in Explaining Policy & Institutional Differences: Historica, Study notes of Advanced Macroeconomics

Download Role of Social Conflict Theory in Explaining Policy & Institutional Differences: Historica and more Study notes Advanced Macroeconomics in PDF only on Docsity! “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model “Why not a Political Coase Theorem ?” Daron Acemoglu Advanced Macroeconomics II — class presentation April 18, 2006 “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Outline 1 How do societies choose policies and institutions, and why would some choose inefficient ones? 2 Three alternative political economy approaches The “Political Coase Theorem” (PCT) The modified PCT Theory of social conflict 3 Historical evidence Colonization North Korea vs. South Korea “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Outline 4 Game-theoretic model Formalization of the political economy approaches Game-theoretic set-up: ruler vs. citizens Enforceable contracts Markov-perfect equilibria without enforceable contracts Repeated-game equilibria with punishment strategies Determinants of policies and institutions “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model The question • Societies choose differing institutions and policies, and institutions and policies affect economic outcomes • How do societies choose their institutions and policies ? • Three political economy approaches • Real question: Why would some societies choose inefficient policies and institutions? • Intuitive political economy answer: “because the social groups in power are interested in their own welfare, not aggregate welfare”, is not obviously true. • The dictator/social group in power could increase aggregate welfare, redistribute to the losers (= Pareto improvement) and pocket even more surplus • “why do powerful groups not predate efficiently?” “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model The question • Societies choose differing institutions and policies, and institutions and policies affect economic outcomes • How do societies choose their institutions and policies ? • Three political economy approaches • Real question: Why would some societies choose inefficient policies and institutions? • Intuitive political economy answer: “because the social groups in power are interested in their own welfare, not aggregate welfare”, is not obviously true. • The dictator/social group in power could increase aggregate welfare, redistribute to the losers (= Pareto improvement) and pocket even more surplus • “why do powerful groups not predate efficiently?” “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model The question • Societies choose differing institutions and policies, and institutions and policies affect economic outcomes • How do societies choose their institutions and policies ? • Three political economy approaches • Real question: Why would some societies choose inefficient policies and institutions? • Intuitive political economy answer: “because the social groups in power are interested in their own welfare, not aggregate welfare”, is not obviously true. • The dictator/social group in power could increase aggregate welfare, redistribute to the losers (= Pareto improvement) and pocket even more surplus • “why do powerful groups not predate efficiently?” “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model The question • Societies choose differing institutions and policies, and institutions and policies affect economic outcomes • How do societies choose their institutions and policies ? • Three political economy approaches • Real question: Why would some societies choose inefficient policies and institutions? • Intuitive political economy answer: “because the social groups in power are interested in their own welfare, not aggregate welfare”, is not obviously true. • The dictator/social group in power could increase aggregate welfare, redistribute to the losers (= Pareto improvement) and pocket even more surplus • “why do powerful groups not predate efficiently?” “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model The question • Societies choose differing institutions and policies, and institutions and policies affect economic outcomes • How do societies choose their institutions and policies ? • Three political economy approaches • Real question: Why would some societies choose inefficient policies and institutions? • Intuitive political economy answer: “because the social groups in power are interested in their own welfare, not aggregate welfare”, is not obviously true. • The dictator/social group in power could increase aggregate welfare, redistribute to the losers (= Pareto improvement) and pocket even more surplus • “why do powerful groups not predate efficiently?” “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches The PCT The modified PCT Theory of social conflict Historical evidence The model How do societies choose their institutions and policies ? The PCT • The Coase Theorem • With well-defined property rights and no transaction costs, agents will contract to a Pareto efficient outcome irrespective of the initial distribution of property rights • The Political Coase Theorem (PCT) • Only policies and institutions that achieve an efficient outcome will be chosen, irrespective of who holds political power • Policies and institutions are not the major determinants of differences in economic outcomes • No such thing as inefficient policies and institutions “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches The PCT The modified PCT Theory of social conflict Historical evidence The model How do societies choose their institutions and policies ? The PCT • The Coase Theorem • With well-defined property rights and no transaction costs, agents will contract to a Pareto efficient outcome irrespective of the initial distribution of property rights • The Political Coase Theorem (PCT) • Only policies and institutions that achieve an efficient outcome will be chosen, irrespective of who holds political power • Policies and institutions are not the major determinants of differences in economic outcomes • No such thing as inefficient policies and institutions “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches The PCT The modified PCT Theory of social conflict Historical evidence The model How do societies choose their institutions and policies ? The modified PCT • There might be uncertainty as to which policies and institutions are optimal • Leaders might hold differing beliefs about which policies and institutions are optimal • Maybe Kim Il Sung truly believed communism was a better option ? • Modified Political Coase Theorem • Only policies and institutions that seem ex ante optimal to the political leaders, based on their beliefs, will be implemented • Ex post inefficiency is explained by “wrong” beliefs “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches The PCT The modified PCT Theory of social conflict Historical evidence The model How do societies choose their institutions and policies ? The modified PCT • There might be uncertainty as to which policies and institutions are optimal • Leaders might hold differing beliefs about which policies and institutions are optimal • Maybe Kim Il Sung truly believed communism was a better option ? • Modified Political Coase Theorem • Only policies and institutions that seem ex ante optimal to the political leaders, based on their beliefs, will be implemented • Ex post inefficiency is explained by “wrong” beliefs “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches The PCT The modified PCT Theory of social conflict Historical evidence The model How do societies choose their institutions and policies ? The modified PCT • There might be uncertainty as to which policies and institutions are optimal • Leaders might hold differing beliefs about which policies and institutions are optimal • Maybe Kim Il Sung truly believed communism was a better option ? • Modified Political Coase Theorem • Only policies and institutions that seem ex ante optimal to the political leaders, based on their beliefs, will be implemented • Ex post inefficiency is explained by “wrong” beliefs “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches The PCT The modified PCT Theory of social conflict Historical evidence The model How do societies choose their institutions and policies ? The theory of social conflict • Dictator/colonial power/social group in power is interested in its own welfare, not aggregate welfare • Two commitment problems make the PCT inapplicable • Those in power cannot promise Pareto improvements, as they cannot commit to ex post redistribute to losers • Those out of power cannot promise to give potential Pareto improvements to the ruler if he agrees to abdicate, as ex post they will be in power • Contracts are not enforceable, there is no “neutral” state with a monopoly on violence: one of the parties is the state “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches The PCT The modified PCT Theory of social conflict Historical evidence The model How do societies choose their institutions and policies ? The theory of social conflict • Dictator/colonial power/social group in power is interested in its own welfare, not aggregate welfare • Two commitment problems make the PCT inapplicable • Those in power cannot promise Pareto improvements, as they cannot commit to ex post redistribute to losers • Those out of power cannot promise to give potential Pareto improvements to the ruler if he agrees to abdicate, as ex post they will be in power • Contracts are not enforceable, there is no “neutral” state with a monopoly on violence: one of the parties is the state “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches The PCT The modified PCT Theory of social conflict Historical evidence The model How do societies choose their institutions and policies ? The theory of social conflict • Dictator/colonial power/social group in power is interested in its own welfare, not aggregate welfare • Two commitment problems make the PCT inapplicable • Those in power cannot promise Pareto improvements, as they cannot commit to ex post redistribute to losers • Those out of power cannot promise to give potential Pareto improvements to the ruler if he agrees to abdicate, as ex post they will be in power • Contracts are not enforceable, there is no “neutral” state with a monopoly on violence: one of the parties is the state “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence Colonization North Korea vs. South Korea The model Historical evidence • Goal: show that the theory of social conflict is the relevant approach to explain choices of policies and institutions • Differences in outcomes are not enough • Differences in corruption levels or property right enforcement might very well be due to different value systems, beliefs or economic environment • e.g.: North American Indians and property rights of land • Need to show that identical (or at least very similar) societies choose differing policies and institutions for reasons that do not directly affect the economic outcome, but that lead to different economic outcomes • Same as an instrumental variable approach “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence Colonization North Korea vs. South Korea The model Historical evidence • Goal: show that the theory of social conflict is the relevant approach to explain choices of policies and institutions • Differences in outcomes are not enough • Differences in corruption levels or property right enforcement might very well be due to different value systems, beliefs or economic environment • e.g.: North American Indians and property rights of land • Need to show that identical (or at least very similar) societies choose differing policies and institutions for reasons that do not directly affect the economic outcome, but that lead to different economic outcomes • Same as an instrumental variable approach “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence Colonization North Korea vs. South Korea The model Historical evidence • Goal: show that the theory of social conflict is the relevant approach to explain choices of policies and institutions • Differences in outcomes are not enough • Differences in corruption levels or property right enforcement might very well be due to different value systems, beliefs or economic environment • e.g.: North American Indians and property rights of land • Need to show that identical (or at least very similar) societies choose differing policies and institutions for reasons that do not directly affect the economic outcome, but that lead to different economic outcomes • Same as an instrumental variable approach “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence Colonization North Korea vs. South Korea The model Historical evidence • Goal: show that the theory of social conflict is the relevant approach to explain choices of policies and institutions • Differences in outcomes are not enough • Differences in corruption levels or property right enforcement might very well be due to different value systems, beliefs or economic environment • e.g.: North American Indians and property rights of land • Need to show that identical (or at least very similar) societies choose differing policies and institutions for reasons that do not directly affect the economic outcome, but that lead to different economic outcomes • Same as an instrumental variable approach “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence Colonization North Korea vs. South Korea The model Historical evidence Colonization • European settlers chose different political institutions in their colonies • European-style property rights in North America, New Zealand etc. • “Extractive” states in Africa, South America, Indonesia etc. • Does the PCT explain these differences ? • Mortality rates of tropical diseases a good instrument: it doesn’t affect output directly (natives are unaffected), but matters greatly to the Europeans. • If PCT is true, mortality rates should not be correlated with the choice of institutions • But they are: PCT rejected • Modified PCT is easily rejected too “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence Colonization North Korea vs. South Korea The model Historical evidence Colonization • European settlers chose different political institutions in their colonies • European-style property rights in North America, New Zealand etc. • “Extractive” states in Africa, South America, Indonesia etc. • Does the PCT explain these differences ? • Mortality rates of tropical diseases a good instrument: it doesn’t affect output directly (natives are unaffected), but matters greatly to the Europeans. • If PCT is true, mortality rates should not be correlated with the choice of institutions • But they are: PCT rejected • Modified PCT is easily rejected too “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence Colonization North Korea vs. South Korea The model Historical evidence Colonization • European settlers chose different political institutions in their colonies • European-style property rights in North America, New Zealand etc. • “Extractive” states in Africa, South America, Indonesia etc. • Does the PCT explain these differences ? • Mortality rates of tropical diseases a good instrument: it doesn’t affect output directly (natives are unaffected), but matters greatly to the Europeans. • If PCT is true, mortality rates should not be correlated with the choice of institutions • But they are: PCT rejected • Modified PCT is easily rejected too “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence Colonization North Korea vs. South Korea The model Historical evidence Colonization • European settlers chose different political institutions in their colonies • European-style property rights in North America, New Zealand etc. • “Extractive” states in Africa, South America, Indonesia etc. • Does the PCT explain these differences ? • Mortality rates of tropical diseases a good instrument: it doesn’t affect output directly (natives are unaffected), but matters greatly to the Europeans. • If PCT is true, mortality rates should not be correlated with the choice of institutions • But they are: PCT rejected • Modified PCT is easily rejected too “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence Colonization North Korea vs. South Korea The model Historical evidence North Korea vs. South Korea • Ethnically, linguistically and economically, Korea is very homogeneous • Per-capita GDP was roughly equal in 1950 • The south became capitalists and (eventually) democratic • The military dictatorship refrained from predatory practices and encouraged capitalism and enforced most property rights • The North became communist and “self-sufficient” • In 1990, North Korean per-capita GDP was 1/6th of South Korea’s, and has been shrinking since • The PCT obviously fails here “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence Colonization North Korea vs. South Korea The model Historical evidence North Korea vs. South Korea • Ethnically, linguistically and economically, Korea is very homogeneous • Per-capita GDP was roughly equal in 1950 • The south became capitalists and (eventually) democratic • The military dictatorship refrained from predatory practices and encouraged capitalism and enforced most property rights • The North became communist and “self-sufficient” • In 1990, North Korean per-capita GDP was 1/6th of South Korea’s, and has been shrinking since • The PCT obviously fails here “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence Colonization North Korea vs. South Korea The model Historical evidence North Korea vs. South Korea • Ethnically, linguistically and economically, Korea is very homogeneous • Per-capita GDP was roughly equal in 1950 • The south became capitalists and (eventually) democratic • The military dictatorship refrained from predatory practices and encouraged capitalism and enforced most property rights • The North became communist and “self-sufficient” • In 1990, North Korean per-capita GDP was 1/6th of South Korea’s, and has been shrinking since • The PCT obviously fails here “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence Colonization North Korea vs. South Korea The model Historical evidence North Korea vs. South Korea • Ethnically, linguistically and economically, Korea is very homogeneous • Per-capita GDP was roughly equal in 1950 • The south became capitalists and (eventually) democratic • The military dictatorship refrained from predatory practices and encouraged capitalism and enforced most property rights • The North became communist and “self-sufficient” • In 1990, North Korean per-capita GDP was 1/6th of South Korea’s, and has been shrinking since • The PCT obviously fails here “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence Colonization North Korea vs. South Korea The model Historical evidence North Korea vs. South Korea • The modified PCT also fails • Not obvious: maybe Kim Il Sung was wrong ex post but, based on his erroneous beliefs, acted sincerely in the interest of the common good • The evident failure of the North Korean model by the 1980s should ave led to a revision of these beliefs. The continuation of the communist dictatorship proves aggregate welfare was never a concern “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Formalization Game-theoretic set-up Enforceable contracts Markov-perfect equilibria Repeated-game equilibria Determinants of institutions Formalization of the political economy approaches • Four variables of interest: known characteristics Xc and uncertain characteristics Xu that affect output, beliefs G on Xu and characteristics Z that do not directly affect output, but affect the output of the ruler • Output: Y = F (Xc ,Xu,P) • Policy choice of the ruler: P(Xc ,Xu,Z ,G ) • Set of Pareto optimal policy: P∗(Xc ,Xu,G ) = arg max P ∫ F (Xc ,Xu,P)dG “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Formalization Game-theoretic set-up Enforceable contracts Markov-perfect equilibria Repeated-game equilibria Determinants of institutions Formalization of the political economy approaches • Four variables of interest: known characteristics Xc and uncertain characteristics Xu that affect output, beliefs G on Xu and characteristics Z that do not directly affect output, but affect the output of the ruler • Output: Y = F (Xc ,Xu,P) • Policy choice of the ruler: P(Xc ,Xu,Z ,G ) • Set of Pareto optimal policy: P∗(Xc ,Xu,G ) = arg max P ∫ F (Xc ,Xu,P)dG “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Formalization Game-theoretic set-up Enforceable contracts Markov-perfect equilibria Repeated-game equilibria Determinants of institutions Formalization of the political economy approaches • Four variables of interest: known characteristics Xc and uncertain characteristics Xu that affect output, beliefs G on Xu and characteristics Z that do not directly affect output, but affect the output of the ruler • Output: Y = F (Xc ,Xu,P) • Policy choice of the ruler: P(Xc ,Xu,Z ,G ) • Set of Pareto optimal policy: P∗(Xc ,Xu,G ) = arg max P ∫ F (Xc ,Xu,P)dG “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Formalization Game-theoretic set-up Enforceable contracts Markov-perfect equilibria Repeated-game equilibria Determinants of institutions Formalization of the political economy approaches • PCT: Y = F (Xc ,ZZXu,P) and P = P(Xc ,ZZXu,@Z ,@G ) • Policies are optimal: P(Xc) ∈ P∗(Xc) • modified PCT: Y = F (Xc ,Xu,P) and P = P(Xc ,Xu,@Z ,G ) • Policies are optimal: P(Xc ,Xu,G ) ∈ P∗(Xc ,Xu,G ) • Theory of social conflict: P = P(Xc ,Xu,Z ,G ) • Policies are not necessarily optimal: P(Xc ,Xu,Z ,G ) /∈ P∗(Xc ,Xu,G ), because rulers now take Z into account “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Formalization Game-theoretic set-up Enforceable contracts Markov-perfect equilibria Repeated-game equilibria Determinants of institutions Formalization of the political economy approaches • PCT: Y = F (Xc ,ZZXu,P) and P = P(Xc ,ZZXu,@Z ,@G ) • Policies are optimal: P(Xc) ∈ P∗(Xc) • modified PCT: Y = F (Xc ,Xu,P) and P = P(Xc ,Xu,@Z ,G ) • Policies are optimal: P(Xc ,Xu,G ) ∈ P∗(Xc ,Xu,G ) • Theory of social conflict: P = P(Xc ,Xu,Z ,G ) • Policies are not necessarily optimal: P(Xc ,Xu,Z ,G ) /∈ P∗(Xc ,Xu,G ), because rulers now take Z into account “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Formalization Game-theoretic set-up Enforceable contracts Markov-perfect equilibria Repeated-game equilibria Determinants of institutions Formalization of the political economy approaches • PCT: Y = F (Xc ,ZZXu,P) and P = P(Xc ,ZZXu,@Z ,@G ) • Policies are optimal: P(Xc) ∈ P∗(Xc) • modified PCT: Y = F (Xc ,Xu,P) and P = P(Xc ,Xu,@Z ,G ) • Policies are optimal: P(Xc ,Xu,G ) ∈ P∗(Xc ,Xu,G ) • Theory of social conflict: P = P(Xc ,Xu,Z ,G ) • Policies are not necessarily optimal: P(Xc ,Xu,Z ,G ) /∈ P∗(Xc ,Xu,G ), because rulers now take Z into account “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Formalization Game-theoretic set-up Enforceable contracts Markov-perfect equilibria Repeated-game equilibria Determinants of institutions Game-theoretic set-up • Citizen • Utility: ut = ∑∞ j=0 β j(ct+j − (1− α)et+j), with ct+j consumption and et+j effort • Production technologies: y it = (e i t) 1−α + R manufacturing (mit = 1) nit = b α(e it) 1−α home production with b < 1 (mit = 0) • Home production is not taxable • First best aggregate outcome: mt = 1 and et = 1 • Ruler • Can tax anyway he wants, with T (Y ) ≤ Y • Can loose his power to another ruler with probability q • Can give power to the citizens (democratization) • Timing • Citizens make production and effort decisions • Ruler sets taxes “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Formalization Game-theoretic set-up Enforceable contracts Markov-perfect equilibria Repeated-game equilibria Determinants of institutions Game-theoretic set-up • Citizen • Utility: ut = ∑∞ j=0 β j(ct+j − (1− α)et+j), with ct+j consumption and et+j effort • Production technologies: y it = (e i t) 1−α + R manufacturing (mit = 1) nit = b α(e it) 1−α home production with b < 1 (mit = 0) • Home production is not taxable • First best aggregate outcome: mt = 1 and et = 1 • Ruler • Can tax anyway he wants, with T (Y ) ≤ Y • Can loose his power to another ruler with probability q • Can give power to the citizens (democratization) • Timing • Citizens make production and effort decisions • Ruler sets taxes “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Formalization Game-theoretic set-up Enforceable contracts Markov-perfect equilibria Repeated-game equilibria Determinants of institutions Game-theoretic set-up • Citizen • Utility: ut = ∑∞ j=0 β j(ct+j − (1− α)et+j), with ct+j consumption and et+j effort • Production technologies: y it = (e i t) 1−α + R manufacturing (mit = 1) nit = b α(e it) 1−α home production with b < 1 (mit = 0) • Home production is not taxable • First best aggregate outcome: mt = 1 and et = 1 • Ruler • Can tax anyway he wants, with T (Y ) ≤ Y • Can loose his power to another ruler with probability q • Can give power to the citizens (democratization) • Timing • Citizens make production and effort decisions • Ruler sets taxes “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Formalization Game-theoretic set-up Enforceable contracts Markov-perfect equilibria Repeated-game equilibria Determinants of institutions Aggregate outcome with enforceable contracts • No-cooperation benchmark: the ruler expropriates all income (i.e. T (Y ) = Y ) and citizen home-produce • Values received by the citizens and rulers are Ŵ and V̂ • Highly inefficient equilibrium • With commitment, ruler can bindingly promise T (Y ) = min (T0,Y ), i.e. any income above T0 is left to the citizen • (assuming q = 0) Ruler maximizes T1−β under the constraint 11−β (e 1−α − (1− α)e + R − T ) ≥ Ŵ • Solution is efficient: e = 1 and m = 1 • Still true if Citizens and Ruler Nash-bargain over the surplus, and with q ≥ 0 “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Formalization Game-theoretic set-up Enforceable contracts Markov-perfect equilibria Repeated-game equilibria Determinants of institutions Aggregate outcome with enforceable contracts • No-cooperation benchmark: the ruler expropriates all income (i.e. T (Y ) = Y ) and citizen home-produce • Values received by the citizens and rulers are Ŵ and V̂ • Highly inefficient equilibrium • With commitment, ruler can bindingly promise T (Y ) = min (T0,Y ), i.e. any income above T0 is left to the citizen • (assuming q = 0) Ruler maximizes T1−β under the constraint 11−β (e 1−α − (1− α)e + R − T ) ≥ Ŵ • Solution is efficient: e = 1 and m = 1 • Still true if Citizens and Ruler Nash-bargain over the surplus, and with q ≥ 0 “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Formalization Game-theoretic set-up Enforceable contracts Markov-perfect equilibria Repeated-game equilibria Determinants of institutions Aggregate outcome with enforceable contracts • No-cooperation benchmark: the ruler expropriates all income (i.e. T (Y ) = Y ) and citizen home-produce • Values received by the citizens and rulers are Ŵ and V̂ • Highly inefficient equilibrium • With commitment, ruler can bindingly promise T (Y ) = min (T0,Y ), i.e. any income above T0 is left to the citizen • (assuming q = 0) Ruler maximizes T1−β under the constraint 11−β (e 1−α − (1− α)e + R − T ) ≥ Ŵ • Solution is efficient: e = 1 and m = 1 • Still true if Citizens and Ruler Nash-bargain over the surplus, and with q ≥ 0 “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Formalization Game-theoretic set-up Enforceable contracts Markov-perfect equilibria Repeated-game equilibria Determinants of institutions Aggregate outcome with enforceable contracts • No-cooperation benchmark: the ruler expropriates all income (i.e. T (Y ) = Y ) and citizen home-produce • Values received by the citizens and rulers are Ŵ and V̂ • Highly inefficient equilibrium • With commitment, ruler can bindingly promise T (Y ) = min (T0,Y ), i.e. any income above T0 is left to the citizen • (assuming q = 0) Ruler maximizes T1−β under the constraint 11−β (e 1−α − (1− α)e + R − T ) ≥ Ŵ • Solution is efficient: e = 1 and m = 1 • Still true if Citizens and Ruler Nash-bargain over the surplus, and with q ≥ 0 “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Formalization Game-theoretic set-up Enforceable contracts Markov-perfect equilibria Repeated-game equilibria Determinants of institutions Markov-perfect equilibria without enforceable contracts • History-independent equilibrium • Ruler has no reason not to grab everything after production decisions have been made • Back to the no-cooperation benchmark equilibrium • Need some kind of commitment device for the Ruler • Repeated-game trigger punishment strategies “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Formalization Game-theoretic set-up Enforceable contracts Markov-perfect equilibria Repeated-game equilibria Determinants of institutions Markov-perfect equilibria without enforceable contracts • History-independent equilibrium • Ruler has no reason not to grab everything after production decisions have been made • Back to the no-cooperation benchmark equilibrium • Need some kind of commitment device for the Ruler • Repeated-game trigger punishment strategies “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Formalization Game-theoretic set-up Enforceable contracts Markov-perfect equilibria Repeated-game equilibria Determinants of institutions Markov-perfect equilibria without enforceable contracts • History-independent equilibrium • Ruler has no reason not to grab everything after production decisions have been made • Back to the no-cooperation benchmark equilibrium • Need some kind of commitment device for the Ruler • Repeated-game trigger punishment strategies “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Formalization Game-theoretic set-up Enforceable contracts Markov-perfect equilibria Repeated-game equilibria Determinants of institutions Repeated-game equilibria with punishment strategies • Assume all citizen follow the same strategy and q = 0 • Ruler: play T (Y ) = min (T0,Y ) if citizens always played e = e0 and m = 1, otherwise play T (Y ) = Y . Value V = T01−β if no deviation • Citizens: play e = e0 and m = 1 if ruler always played T (Y ) = min (T0,Y ), otherwise play m = 0. Value W = 11−β (e 1−α 0 − (1− α)e0 + R − T0) if no deviation • Incentive constraints • Ruler: e1−α0 + R + βV̂ ≤ V ⇒ T0 not “too low” • Citizens: Ŵ ≤ W ⇒ T0 not “too high” “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Formalization Game-theoretic set-up Enforceable contracts Markov-perfect equilibria Repeated-game equilibria Determinants of institutions Repeated-game equilibria with punishment strategies • Assume all citizen follow the same strategy and q = 0 • Ruler: play T (Y ) = min (T0,Y ) if citizens always played e = e0 and m = 1, otherwise play T (Y ) = Y . Value V = T01−β if no deviation • Citizens: play e = e0 and m = 1 if ruler always played T (Y ) = min (T0,Y ), otherwise play m = 0. Value W = 11−β (e 1−α 0 − (1− α)e0 + R − T0) if no deviation • Incentive constraints • Ruler: e1−α0 + R + βV̂ ≤ V ⇒ T0 not “too low” • Citizens: Ŵ ≤ W ⇒ T0 not “too high” “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Formalization Game-theoretic set-up Enforceable contracts Markov-perfect equilibria Repeated-game equilibria Determinants of institutions Repeated-game equilibria with punishment strategies • Assume all citizen follow the same strategy and q = 0 • Ruler: play T (Y ) = min (T0,Y ) if citizens always played e = e0 and m = 1, otherwise play T (Y ) = Y . Value V = T01−β if no deviation • Citizens: play e = e0 and m = 1 if ruler always played T (Y ) = min (T0,Y ), otherwise play m = 0. Value W = 11−β (e 1−α 0 − (1− α)e0 + R − T0) if no deviation • Incentive constraints • Ruler: e1−α0 + R + βV̂ ≤ V ⇒ T0 not “too low” • Citizens: Ŵ ≤ W ⇒ T0 not “too high” “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Formalization Game-theoretic set-up Enforceable contracts Markov-perfect equilibria Repeated-game equilibria Determinants of institutions Repeated-game equilibria with punishment strategies • Assume all citizen follow the same strategy and q = 0 • Ruler: play T (Y ) = min (T0,Y ) if citizens always played e = e0 and m = 1, otherwise play T (Y ) = Y . Value V = T01−β if no deviation • Citizens: play e = e0 and m = 1 if ruler always played T (Y ) = min (T0,Y ), otherwise play m = 0. Value W = 11−β (e 1−α 0 − (1− α)e0 + R − T0) if no deviation • Incentive constraints • Ruler: e1−α0 + R + βV̂ ≤ V ⇒ T0 not “too low” • Citizens: Ŵ ≤ W ⇒ T0 not “too high” “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Formalization Game-theoretic set-up Enforceable contracts Markov-perfect equilibria Repeated-game equilibria Determinants of institutions Repeated-game equilibria with punishment strategies • Assume all citizen follow the same strategy and q = 0 • Ruler: play T (Y ) = min (T0,Y ) if citizens always played e = e0 and m = 1, otherwise play T (Y ) = Y . Value V = T01−β if no deviation • Citizens: play e = e0 and m = 1 if ruler always played T (Y ) = min (T0,Y ), otherwise play m = 0. Value W = 11−β (e 1−α 0 − (1− α)e0 + R − T0) if no deviation • Incentive constraints • Ruler: e1−α0 + R + βV̂ ≤ V ⇒ T0 not “too low” • Citizens: Ŵ ≤ W ⇒ T0 not “too high” “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Formalization Game-theoretic set-up Enforceable contracts Markov-perfect equilibria Repeated-game equilibria Determinants of institutions Repeated-game equilibria with punishment strategies • Incentive constraints might be incompatible for m = 1 and e0 = 1: the PCT does not always hold • Inefficient production equilibria (m = 1) might exist for lower e0 • For q ≥ 0, PCT is even less likely: ruler, at risk of losing power, has a higher discount rate • With Nash bargaining, a surprising result: with increasing bargaining power for the citizen, the equilibrium e0 becomes lower, i.e. the equilibrium is less efficient “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Formalization Game-theoretic set-up Enforceable contracts Markov-perfect equilibria Repeated-game equilibria Determinants of institutions Repeated-game equilibria with punishment strategies • Incentive constraints might be incompatible for m = 1 and e0 = 1: the PCT does not always hold • Inefficient production equilibria (m = 1) might exist for lower e0 • For q ≥ 0, PCT is even less likely: ruler, at risk of losing power, has a higher discount rate • With Nash bargaining, a surprising result: with increasing bargaining power for the citizen, the equilibrium e0 becomes lower, i.e. the equilibrium is less efficient “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Formalization Game-theoretic set-up Enforceable contracts Markov-perfect equilibria Repeated-game equilibria Determinants of institutions Determinants of policies and institutions • If the PCT doesn’t apply, • the distribution of power between ruler and citizens matter; • the time horizon of the ruler matters; • who writes the constitution matters • e.g.: colonization • Extension: a low cost of “launching a revolution” and a high probability of success (“good checks and balances”) can help the PCT to apply • Extension: in the case of lump-sum taxation and an inefficient production equilibrium, citizens are individually tempted to produce more (they are marginal), pushing Y too high (ruler predates everything) • Taxes have to be distortionary to prevent citizens from over-investing “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Formalization Game-theoretic set-up Enforceable contracts Markov-perfect equilibria Repeated-game equilibria Determinants of institutions Determinants of policies and institutions • If the PCT doesn’t apply, • the distribution of power between ruler and citizens matter; • the time horizon of the ruler matters; • who writes the constitution matters • e.g.: colonization • Extension: a low cost of “launching a revolution” and a high probability of success (“good checks and balances”) can help the PCT to apply • Extension: in the case of lump-sum taxation and an inefficient production equilibrium, citizens are individually tempted to produce more (they are marginal), pushing Y too high (ruler predates everything) • Taxes have to be distortionary to prevent citizens from over-investing “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Formalization Game-theoretic set-up Enforceable contracts Markov-perfect equilibria Repeated-game equilibria Determinants of institutions Determinants of policies and institutions • If the PCT doesn’t apply, • the distribution of power between ruler and citizens matter; • the time horizon of the ruler matters; • who writes the constitution matters • e.g.: colonization • Extension: a low cost of “launching a revolution” and a high probability of success (“good checks and balances”) can help the PCT to apply • Extension: in the case of lump-sum taxation and an inefficient production equilibrium, citizens are individually tempted to produce more (they are marginal), pushing Y too high (ruler predates everything) • Taxes have to be distortionary to prevent citizens from over-investing “Why not a Political Coase Theorem ?” Daron Acemoglu Introduction Political economy approaches Historical evidence The model Formalization Game-theoretic set-up Enforceable contracts Markov-perfect equilibria Repeated-game equilibria Determinants of institutions Determinants of policies and institutions • If the PCT doesn’t apply, • the distribution of power between ruler and citizens matter; • the time horizon of the ruler matters; • who writes the constitution matters • e.g.: colonization • Extension: a low cost of “launching a revolution” and a high probability of success (“good checks and balances”) can help the PCT to apply • Extension: in the case of lump-sum taxation and an inefficient production equilibrium, citizens are individually tempted to produce more (they are marginal), pushing Y too high (ruler predates everything) • Taxes have to be distortionary to prevent citizens from over-investing