References and Literature
The material in this chapter draws on the large political economy literature and also on some of the recent work on the political economy of growth. My purpose has not been to provide a balanced survey of these literatures, but to emphasize the most important features pertaining to the sources of differences in economic institutions and policies across societies with the hope of shedding some light on differential cross-country growth performances.
As noted above, I focused throughout on the neoclassical growth model and its variants in order to isolate the contribution of political economy mechanisms and also to keep the exposition manageable.Persson and Tabellini (2000) provides an excellent survey of much of the work done in political economy in the 1980s and 1990s, though does not focus on the political economy of growth. Drazen (2001) also provides an excellent introduction to this work, with slightly more emphasis on growth issues. Eggertsson (2005) provides a non-formal discussion of the same issues as well as a wider set of political economy questions.
The material in Sections 22.2, 22.3 and 22.4 and the discussion of revenue extraction and factor price manipulation effects draw upon Acemoglu (2007a,b), but the setup has been modified to be more consistent with the neoclassical growth model. Versions of the factor price manipulation effect feature in Acemoglu (2008), which will be discussed in the next chapter, and also in Galor, Moav and Vollrath (2005), who emphasize how the land-owning elite may discourage investment in human capital. The political replacement effect is also discussed in Acemoglu (2007a,b), though it originates in Acemoglu and Robinson (2000b).
A detailed analysis of why the political elite may block technological innovations in order to increase the likelihood of their survival is presented in Acemoglu and Robinson (2007a).
That paper also shows how both relatively secure elites and elites that are in competitive political environments will not have incentives to block technological change, but those with intermediate levels of security that might be challenged by new technologies are likely to adopt policies that will block economic development. It also provides historical examples of this type of behavior. Models with competitive economic behavior by price-taking agents, but strategic political decisions were first developed by Chari and Kehoe (1990, 1993), though the focus in these papers is on the “time-consistency” of the behavior of a benevolent government.The material in Section 22.5 builds upon the analysis of MPE in competitive economies with capital accumulation in Krusell and Rios-Rull (1997), Klein, Krusell and Rios-Rull (2004) and Hassler, Krusell, Storesletten and Zilibotti (2004). The first two papers compute the MPE numerically in a related environment, while the last one contains characterization results for an economy with quadratic preferences and linear technology. Acemoglu and Robinson (2000, 2001, 2007a) and Hassler, Rodriguez-Mora, Storesletten and Zilibotti (2003) provide explicit characterizations of MPE in simpler political environments.
The material in Section 22.6 is largely standard. An excellent introduction to social choice theory, with a thorough discussion of Arrow’s Theorem, is provided in Austen-Smith and Banks (2000). My proof of the theorem here builds on the somewhat longer proof in Austen- Smith and Banks (2000). Arrow (1951) is still the classic for the basis of social choice theory and for Arrow’s Theorem, though similar ideas were also developed in earlier work by Black (1948). The single crossing property is introduced in Roberts (1977) and further developed by Gans and Smart (1996). The notion of intermediate preferences introduced in Exercise 22.28 is due to Grandmont (1978). The Downsian model of political competition is introduced in Downs (1957), and builds heavily on Hotelling’s seminal (1929) paper.
Austen-Smith and Banks (2000) and Persson and Tabellini (2000) discuss the Downsian party competition model in detail. The probablilistic voting model is due to Lindbeck and Weibull (1987) and Coughlin (1992). Persson and Tabellini (2000) provided detailed treatment of this model. My exposition here was simplified by the assumption that parties care about their vote share, not the probability of coming to power. There are many different lobbying models in the literature. The first one was formulated by Becker (1983). The one presented here builds on Grossman and Helpman (1994), which in turn builds on the menu auctions approach of Bernheim and Winston (1986). Grossman and Helpman (2001) provides a more detailed exposition of various different lobbying models.Section 22.7 presents one of the most standard models of distributional conflict, which uses the celebrated Median Voter Theorem (which was presented in Section 22.6). The Median Voter Theorem was first applied to an economy with linear redistributive taxes by Roberts (1977) and Romer (1975). Meltzer and Richard (1981) used the Roberts-Romer model to relate inequality to taxes and more importantly, to draw implications about the extent of the voting franchise on the size of the government. Meltzer and Richard’s work is a classic as it can be viewed as the beginning of positive political economy, i.e., the use of political economy models in order to explain cross-country and over-time differences in public policies. A number of authors have since applied the Roberts-Romer model in growth settings. The most notable examples are Alesina and Rodrik (1994), Persson and Tabellini (1994), Saint-Paul and Verdier (1996) and Benabou (2000). The models in Alesina and Rodrik (1994) and Persson and Tabellini (1994) are very similar to the one I developed in Section 22.7, except for some technical details and except that they focus on an economy with endogenous growth, so that differences in taxes lead to differences in equilibrium growth rates (see Exercise 22.35).
Both Alesina and Rodrik and Persson and Tabellini emphasize the negative effects of inequality on economic growth, interpreting the gap between the mean and the median as a measure of inequality. They also present cross-country evidence suggesting that inequality is negatively correlated with economic growth. This cross-country growth evidence is difficult to interpret, however, since there are many omitted variables in such growth regressions, and other researchers have found no relationship, and some have even found a positive relationship, between inequality and growth (see, for example, Barro, 2000, Banerjee and Duflo, 2003, and Forbes, 1996). Saint-Paul and Verdier (1996), on the other hand, showed that higher inequality can lead to greater growth, because tax revenues may be invested in human capital accumulation. Benabou’s important (2000) paper pushes this idea further, and shows how a negative relationship between inequality and growth is consistent with higher inequality leading to less redistribution in a world in which greater redistribution may be growth-enhancing, again because taxes are partly invested in education. None of these papers characterize the MPE of a dynamic economy, instead assuming that voting is either myopic or is done once at the beginning of time. Thus the model in Section 22.7 is a small contribution to this literature as it derives these results as a well-defined MPE of a simple neoclassical growth model with linear preferences.Finally, Section 22.8 builds on Acemoglu (2005). The idea that weak states might be an important impediment to economic growth is popular among political scientists and political sociologists, and is most famously articulated in Migdal (1988), Tilly (1990), Wade (1990), Herbst (2000) and Evans (2000). These approaches typically do not incorporate the incentives of the politicians or the government in providing public goods or adopt growth-enhancing strategies. Acemoglu (2005) provides the first formal framework to analyze these issues, and the material in this section embeds the baseline model in that paper into a neoclassical growth model.
22.11.