When Are Autocracies Economically Efficient

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When Are Autocracies Economically Efficient?

• David Epstein, Columbia University
• Peter Rosendorff, University of Southern
  California

2
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

3
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

Soviet State
4
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 State Govts
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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

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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

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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 TGgtG

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Objectives

• Workers Wages1, so
• UL L
• Residual R Fm(Km,Lm)I(TG) Lm accrues to K
  owners.
• Notice that Km,Lm gt 0 iff TGgtG then
• UK(k) (1-t) R k if TGgtG, 0 otherwise.
• Think of R as relative earnings of capital
• Capital Owners
• UK(1-t)R-k

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Governments 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

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Governments 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.

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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

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U(L)
L
(1-b)
L
G
t
a
RF(K,L)-L
b
F(K,L)
K
U(K)
Political Sector
Economic Sector
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U(L)
L
(1-b)
L
g, TG
G
t
a
RF(K,L)-L
k
b
F(K,L)
K
U(K)
Political Sector
Economic Sector
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Equilibrium Under Autocracy

• Contest allocations

• Only have nonzero allocations if ?/?gtgt1.
• Degree of political/economic mismatch ?/?
• Secure autocrats are the most inefficient
• Expenditures rise with R (and with K)

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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

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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.

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Two Branches, Fixed Sharing

• Two entities, P and C, can each attack capital
  now
• t (pc) / (pck)
• Assume first that all tax revenue generated is
  split 50-50
• Then
• Equilibrium tax rates fall
• Extraction occurs only if ?/? gt pS gt 2
• Extraction requires an even greater degree of
  mismatch
• Resource dissipation falls as well

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Proportional Sharing

• Tax revenue is shared according to amount each
  invests in attacking K
• P earns tp/(pc) C earns tc/(pc)
• Now both tax rates and dissipation rise
• Why?
• Previous equilibrium made interbranch relations
  into a collective action problem
• Now its a common pool resource problem
• So they overgraze the taxable sector

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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