Embedded autonomy, political institutions, and access orders

Abstract

We construct a model of “embedded autonomy,” the idea that the closeness of bureaucrats and business people may lead to growth‐promoting policies by the government, though at the risk of leading to crony capitalism. We analyze how the level of monitoring to control corruption and the weight given to the future affect the nature of the possible outcomes. We explore possible tradeoffs between growth and inclusiveness and discuss how our model relates to more general concepts of inclusiveness of institutions, as framed by Acemoglu and Robinson, or the nature of “access orders,” as introduced by North, Wallis, and Weingast.

A model of embedded autonomy and asymmetric information

“…The current paper adopts a similar approach to modelling the concept of embedded autonomy, as a closeness between bureaucrats and industrialists that can lead to socially more efficient decision making, but also to worse decisions when cronyism dominates. By contrast to Lyu and Singh (2021), the current paper highlights the role of asymmetries of information more explicitly, so that the value of closeness in decision-making is clearer-greater closeness between bureaucrats and industrialists leads to more accurate signals about the quality of, and return associated with, potential investments. 4 However, greater closeness also distorts the decision-making criteria used by bureaucrats as a result of cronyism.…”

“…In any case, our contribution in the current paper can be viewed as complementary to Lyu and Singh (2021), and the two papers represent what we believe are among the first attempts to formally model the economics of embedded autonomy. The next section describes the economic environment of our model.…”

“…Our model does have a broad parallel with that of Lyu and Singh (2021), in that it permits an interpretation in terms of broader discussions of state capacity and development. Two recent surveys of the role of the state in development allow us to frame our potential contribution.…”

“…In all this literature, there does not appear to have been much attention to constructing formal economic models that incorporate the concept of embedded autonomy. As far as we are aware, Lyu and Singh (2021) were the first to to attempt a formal model. That analysis used a framework in which closeness of bureaucrats and industrialists would favour the choice of high growth investments, but also facilitate corruption (bribery and tax evasion) through cronyism, leading to a possible tension between the two effects.…”

“…4 However, greater closeness also distorts the decision-making criteria used by bureaucrats as a result of cronyism. 5 To keep the analysis focused, our model is a partial equilibrium one, in contrast to Lyu and Singh (2021). However, the current model still allows for a consideration of development dynamics, in terms of how embedded autonomy might evolve.…”