This paper proposes a specific mechanism to explain differences in political institutions based on the asymmetric and uncertain costs of civil conflicts. Asymmetry implies that the net benefit of fighting an insurgency is not shared equally by members of the elite. But uncertainty implies that these benefits are more evenly distributed ex-ante. The members of the elite face a commitment problem: they would like to commit in advance to a strong response to insurgencies, but ex-post they have the incentives to block any response if the conflict mainly affects other members of the elite. One way of solving this is empowering the executive so he may react forcefully to conflicts, despite the opposition of some fraction of the elite. In the model this group has to decide on the constraints imposed on the executive. Fewer constraints lead to a higher risk of expropriation. But more constraints lead to a suboptimal response to conflicts. The main prediction is that, conditional on asymmetric and uncertain costs, the higher is the likelihood of a civil conflict in the future, the lower are the constraints imposed on the executive. The paper empirically validates this implication using two types of evidence. First, it uses a sample of former colonies that became independent after WWII and geographic variables to identify the exogenous component of the likelihood of civil conflicts at the moment of the independence. Second, the model is used to explain the political events in the Americas after independence. Countries less prone to internal conflicts were the ones that imposed more constraints on the executive during the second half of the nineteenth century. Resumen Este trabajo propone un mecanismo específico para explicar diferencias en instituciones políticas basado en la asimetría e incertidumbre que poseen los costos de ciertos conflictos civiles. La asimetría implica que el beneficio neto de pelear contra una insurgencia nos es compartido de forma similar entre los miembros de la clase gobernante o elite. Pero la incertidumbre implica que estos beneficios están mejor distribuidos con anterioridad a que se produzca un conflicto. Debido a esto a los miembros de la elite les gustaría comprometerse a una respuesta fuerte a cualquier insurgencia en el futuro, pero luego que ésta ocurre tienen el incentivo a bloquear una respuesta fuerte si ellos no son afectados de forma importante. Una manera de solucionar este problema es empoderando al ejecutivo para que éste pueda reaccionar de manera más fuerte ante un eventual conflicto, no obstante la oposición de una fracción de la elite. En el modelo este grupo debe decidir en las restricciones que se imponen al ejecutivo. Menores restricciones llevan a un riesgo de expropiación mayor, pero mayores restricciones llevan a una respuesta débil a conflictos civiles. La principal predicción del modelo es que, condicionando en costos asimétricos e inciertos, mientras mayor es la probabilidad de un conflicto civil en el futuro, menores son las restricciones impuestas al ejecutivo. El t...
This paper studies the effects of contracting institutions on economic development. A growth model is presented with endogenous incomplete markets, where financial frictions generated by the imperfect enforcement of contracts depend on the future growth of the economy, which determines the costs of being excluded from financial markets after defaulting. As the economy approaches its balanced growth path, frictions and their effect on income become more important because the net benefits of honoring contracts decrease. Therefore, as the economy approaches its steady state, the effect of contracting institutions on GDP per capita increases. This effect is due not only to a slower accumulation of capital, but also to a misallocation of resources toward labor-intensive productive sectors, where self-enforcing incentives are stronger. To validate the model empirically, the paper modifies previous specifications of crosscountry regressions to estimate the effect of contracting institutions on per capita GDP. In line with the main predictions of the model, the econometric evidence shows that this effect is larger in economies that were relatively close to their steady states in 1950. Unlike contracting institutions, the evidence shows that property-rights institutions, included in an extension to the model, have an effect on income per capita throughout the development process. I thank Harold L. Cole and Dirk Krueger for helpful comments, discussions and guidance. I also thank
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.
hi@scite.ai
10624 S. Eastern Ave., Ste. A-614
Henderson, NV 89052, USA
Copyright © 2024 scite LLC. All rights reserved.
Made with 💙 for researchers
Part of the Research Solutions Family.