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State, and the 2001 Canadian Economics Association meeting in Montreal. The usual disclaimer applies.

This paper develops a taxonomy of political regimes that distinguishes between three sets of rights—property rights, political rights and civil rights. The truly distinctive nature of liberal democracy is the protection of civil rights (equal treatment by the state for all groups) in addition to the other two. The paper shows how democratic transitions that are the product of a settlement between the elite (who care mostly about property rights) and the majority (who care about political rights), generically fail to produce liberal democracy. Instead, the emergence of liberal democracy requires low levels of inequality and weak identity cleavages.

The version presented here is a Working Paper (or 'pre-print') that may be later published elsewhere.

, and seminar participants at Harvard, the NBER, and the Board of Governors of the Fed for very helpful comments. The Ford and Rockefeller Foundations have provided financial support for this research, which we gratefully acknowledge. The views expressed in this paper are those of the authors and not necessarily those of the National Bureau of Economic Research.

We consider a model of policy choice in which appropriate policies depend on a country's own circumstances, but the presence of a successful leader generates an informational externality and results in too little "policy experimentation." Corrupt governments are reined in while honest governments are disciplined inefficiently. Our model yields distinct predictions about the patterns of policy imitation, corruption, and economic performance as a function of a country's location vis-à-vis successful leaders. In particular, it predicts a U-shaped pattern in economic performance as we move away from the leader in the relevant space of characteristics: close neighbors should do very well, distant countries moderately well on average with considerable variance, and intermediate countries worst of all. An empirical test with the experience of postsocialist countries provides supportive results.

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