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Ruling elites’ rotation and asset ownership: implications for property rights

Abstract

We provide a theory and empirical evidence indicating that the rotation of ruling elites in conjunction with elites’ asset ownership could improve property rights protection in non-democracies. The mechanism that upholds property rights is based on elites’ concern about the security of their own asset ownership in the event they lose power. Such incentives provide a solution to the credible commitment problem in maintaining secure property rights when institutional restrictions on expropriation are weak or absent.

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Fig. 1

Notes

  1. 1.

    This logic is consistent with Levi’s (1989) earlier observation that politicians who expect to stay in power over a long period of time have the incentive to improve institutions that would generate an increased flow of revenues.

  2. 2.

    In fact, Olson himself in his earlier work saw benefits of political instability for the institutional quality and economic development (Olson 1982); the evolution and possibly inconsistency of Olson’s thinking on merits of political (in)stability is discussed in Rose-Ackerman (2003).

  3. 3.

    Attributed to the Brazilian President Getulio Vargas. In the terminology of Acemoglu and Robinson (2012), non-inclusive (i.e., non-democratic) political institutions usually entail non-inclusive (discriminatory) economic institutions and policies.

  4. 4.

    Sticky institutions could still exhibit substantial change, even in a relatively short period of time; inertia does not prevent institutional change, but makes it less drastic.

  5. 5.

    Acemoglu and Robinson (2008) similarly assume that elite and non-elite take utility in different types of public goods. See also Bourguignon and Verdier (2012), on how the type of assets owned by the elites affects institutions and economic policies.

  6. 6.

    Our approach is more flexible than the “...assumption (which is common in the literature on endogenous institutions ...that the incumbent government can bind its successor one period ahead” (Besley and Persson 2011, p. 267; see also Besley et al. 2012) In the general distributed lag model one has \(a(t) = \int _{t-\tau }^{t} b(s) \,d \Phi (t-s)\), for some cumulative lag distribution function \(\Phi\). In particular one could have \(1 > \Phi (0) > 0\), in which case institutional changes partly (with a positive weight) have immediate effect.

  7. 7.

    For small \(\lambda\) and/or \(\tau\) one has \(\pi \approx \lambda \tau\).

  8. 8.

    In the case of distributed lags described in Footnote 6 Eq. (1) still holds with \(\pi \equiv \int _{0}^{\tau } p(x) \,d \Phi (x) = p(\tau ) + \lambda \int _{0}^{\tau } \Phi (x) \exp {(-2 \lambda x)} \,d x\). For example, if \(a(t) = \sigma b(t) + (1 - \sigma ) b(t - \tau )\), i.e., institutions at time t reflect elites’ choices at times t and \(t - \tau\) with weights \(\sigma\) and \(1 - \sigma\), then \(\pi = \frac{(1 - \sigma )}{2} (1 - \exp {(-2 \lambda \tau )})\), or, for small \(\lambda\) and/or \(\tau\), \(\pi \approx (1 - \sigma ) \lambda \tau\). As before, \(\pi\) increases in \(\lambda\) and can be considered as a measure of elite rotation.

  9. 9.

    This analogy, however, is incomplete, since in our case the risky asset itself depends on wealth, and hence condition (i) is sufficient, but not necessary; for details see the proof of Proposition 4 in the Appendix A.

  10. 10.

    The conclusion that sufficiently sizable asset ownership by ruling elites (\(w > 1 - \pi\)) makes their policies socially optimal is similar to McGuire and Olson’s (1996). Notice, however, that in our case this conclusion requires elites’ rotation (\(\pi > 0\)) and hence is inapplicable to a “stationary bandit”. This is yet another example of the complementarity between elites’ rotation and asset ownership.

  11. 11.

    In an alternative model of path dependency endogenous property rights obtain as a subgame perfect Nash equilibrium wherein the strategies of elite groups reflect past history of their interaction. Elites can cooperate with each other by refraining from full expropriation while in power on the expectation of reciprocity after a power shift. In the case of defection the cooperation breaks down and all elite groups resort to full expropriation thereafter (Dixit et al. 2000). One can show that the set of sustainable allocations from which no one defects expands as elite rotation accelerates, and for high rotation rates this set includes first-best Pareto efficient outcomes, for which political constraints are not binding (Acemoglu et al. 2011). However, such models say nothing about the actual institutional outcomes of elite interaction, other than stating that the set of such outcomes grows bigger, and hence have a lower predictive power than the approach presented in this section.

  12. 12.

    Online Appendix B can be accessed at the link (doi:10.1007/s11127-014-0210-2).

  13. 13.

    Still, this measure does not fully reflect important features of political institutions, such as the distinctions between parliamentary and presidential systems. However such distinctions are less relevant for nominal democracies and autocracies that are the countries of interest for our analysis.

  14. 14.

    There is no earlier information in the Database of Political Institutions.

  15. 15.

    Recall that Campante et al. (2009) observed a U-shaped relationship between corruption and elite rotation.

  16. 16.

    The actual gap in average rotation rates between democracies and non-democracies is probably even wider, because over the time span of observation the political changes were mostly from less to more democracy, and hence the rotation rates for countries deemed to be democracies in a given year could be pulled down by the non-democratic portions of the preceding 20-year period.

  17. 17.

    Notice that since the inequality dummy is time-independent, we cannot use country fixed effects in such estimations.

  18. 18.

    To put this in a perspective, for 738 autocrats in the Svolik (2012) dataset, the average stay in power was \(12.4\) years, whereas the median stay in power—just \(3.2\) years, or well short of the six-year “saturation threshold” (Holcombe and Boudreaux 2013). According to Ezrow and Frantz (2011), average number of years in office is \(10\) for “personalist dictators”, eight for single-party dictators, and three years—for military dictators.

  19. 19.

    We are grateful to a reviewer of the Journal for pointing out to the need of path dependency analysis for earlier years.

  20. 20.

    Lags of five years or more leave too few observations in the truncated panel, and the quality of estimation deteriorates.

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Acknowledgments

Authors are grateful to Philip Keefer, Scott Gehlbach, Sergey Popov, Petros Sekeris, Antoine Loeper, Pablo Spiller, Saumitra Jha, Gary Libecap, Rinat Menyashev, Victor Polterovich, Adam Przeworski, Michael Alexeev and the anonymous reviewers for stimulating discussions and comments. The usual disclaimer applies. Support of the Program of Fundamental Studies of the National Research University Higher School of Economics is gratefully acknowledged.

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Correspondence to Georgiy Syunyaev.

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Supplementary material (PDF 79 kb)

Appendix A Proofs of Propositions

Appendix A Proofs of Propositions

Proof of Proposition 1

Assume that group i holds power at time t, and consider for a small \(\epsilon > 0\) and \({b^0} \in [0,1]\) the following “spike variation” \(\widetilde{b}_i (s)\) of the strategy \(b_i^{*}\): (i) \(\widetilde{b}_i (s) = b^0\) for \(s \in [t,t + \epsilon ]\), unless group i loses power before \(s = t + \epsilon\), in which case \({b^0}\) is played until the first power shift, and both groups play their initial strategies afterwards; and (ii) group i reverts to its original strategy \(b_i^{*}\) for \(s > t + \epsilon\). The strategy \(b_j^{*}\) of group j remains unchanged. One can verify that the change \(\Delta {U_i}\) of group i’s expected utility from time t onwards allows the following representation:

$$\begin{aligned} \Delta U_i &= \bigg \{ \Big [ \pi U(b^{0}) + (1 - \pi )U(1 - (1 - b^{0})(1 - w_i)) \Big ] \\ &\quad - \Big [ \pi U(b_i^{*} w_i) + (1 - \pi )U(1 - (1 - b_i^{*})(1 - w_i)) \Big ] \bigg \} \\&\quad \times \exp {(-2 \lambda \epsilon )} \int _{\tau }^{\tau + \epsilon } \exp {(-\delta t)} \,d t + D(b^{0}, \epsilon ), \end{aligned}$$

where \(\lim _{\epsilon \rightarrow 0} \dfrac{D(b^{0},\epsilon )}{\epsilon } = 0\) uniformly by \({b^{0}}\). (The expression \(\exp {(-2 \lambda \epsilon )}\) is the probability that the incumbent group at time t will stay in power at least until \(t + \epsilon\), and that the incumbent group at time \(t + \tau\) will stay in power at least until \(t + \tau + \epsilon\); given the nature of the Poisson process, these are independent events).

One has \(\Delta U_i \le 0\), and therefore

$$\begin{aligned} 0 \ge \lim _{\epsilon \rightarrow 0} \dfrac{\Delta U_i}{\epsilon } &= \bigg \{ \Big [ \pi U(b^{0} w_i) + (1 - \pi )U(1 - (1 - b^{0})(1 - w_i)) \Big ] \\&\quad - \Big [ \pi U(b_i^{*} w_i) + (1 - \pi )U(1 - (1 - b_i^{*})(1 - w_i)) \Big ] \bigg \} \exp {(- \delta \tau )}, \end{aligned}$$

for any \({b^{0}}\), which entails Proposition 1. \(\square\)

Proof of Proposition 2

Since \({b^{*}} w + 1 - {b^{*}} \ge {b^{*}} w\), the left-hand side of the first-order condition (2) is less than or equal to one. On the other hand inequality (3) holds if and only if the right-hand side of (2) is greater than or equal to one, and therefore whenever \(\pi + w \ge 1\), the corner solution \({b^{*}} = 1\) obtains. \(\square\)

Proof of Proposition 3

One can easily check that the left-hand side of the Eq. (2) is a monotonically increasing function of \(b \in [0,1]\) and also takes values from \(0\) to \(1\). According to (2), it means that indeed \(b\) increases from \(0\) to \(1\) in the range \(\pi \in [0,1 - w]\). For \(\pi > 1 - w\), the corner solution \({b^{*}} = 1\) obtains. \(\square\)

Proof of Proposition 4

When \(w = 0,\; b^{*} = 0\)—with no production assets elites are oblivious to property rights after losing power, and hence prefer full expropriation. When \(w > 1 - \pi\), as stated earlier, property rights are fully secured (\({b^{*}} = 1\)). In the \((0,1 - \pi )\) range the problem (1) has an interim solutions, and differentiating the first-order condition (2) by \(w\) yields

$$\dfrac{\partial {b^{*}}}{\partial w} \Big [ {w^2} R ({b^{*}} w) + w(1 - w)R({b^{*}} w + 1 - {b^{*}}) \Big ] = \dfrac{1}{1 - w} + {b^{*}} w \Big [ R({b^{*}} w + 1 - {b^{*}}) - R({b^{*}} w) \Big ].$$

Since \({b^{*}} w + 1 - {b^{*}} \ge {b^{*}} w\), the required result immediately follows from condition (i). Alternately observe that \({b^{*}} w R ({b^{*}} w) = r ({b^{*}} w) \le 1 < 1/(1 - w)\), and the same result follows from (ii). \(\square\)

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Polishchuk, L., Syunyaev, G. Ruling elites’ rotation and asset ownership: implications for property rights. Public Choice 162, 159–182 (2015). https://doi.org/10.1007/s11127-014-0210-2

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Keywords

  • Endogenous property rights
  • Credible commitment
  • “Stationary bandit”

JEL Classification

  • K11
  • O17
  • P14