Optimal Political Institutions in the Shadow of Conflict

Andrea Canidio (IMT School for Advanced Studies, Lucca)
Joan Esteban (Institut d’Anàlisi Econòmica and Barcelona GSE)

Abstract : Two players with conflicting interests make investments and then decide whether to trigger a conflict or maintain peace. In case of conflict, these investments determine the players’ fighting strength and hence their payoffs. In case of peace, preexisting common political institutions determine the players’ payoffs as a function of their investments. We consider the set of political institutions with full information and full commitment and characterize the set of investments compatible with peace. We show that, to maintain peace, the most efficient political institutions may nonetheless distort the players’ investments away from the first-best levels. We find conditions under which this distortion is so large, that political institutions capable of maintaining peace do not exist. Therefore, we provide a novel explanation to why rational players may engage in an inefficient conflict, and to why inefficient political institutions exist.

A Theory of Power Structure and Institutional Compatibility: China Vs. Europe Revisited

Ruixue Jia (LSE and University of California, San Diego)
Gerard Roland (University of California, Berkeley)
Yang Xie (University of California, Riverside)

Abstract : We synthesize two differences in the power structure of society between Imperial China and Premodern Europe: the Ruler’s absolute power was weaker in Europe, while in China the People were more comparable with the Elites regarding their power and rights. Why was a more symmetric Elite–People relationship compatible with a stronger, not weaker absolute power of the Ruler? We analyze a model of autocratic stability, where we read a stronger absolute power of the Ruler as conditioning more power and rights of the ruled on the Ruler’s will. We show that the stronger the absolute power, the more a more balanced Elite–People relationship will stabilize the autocratic rule, and the greater the Ruler’s incentive to promote such balance, thereby answering the question. Discussion and stylized facts support the theory’s relevance. The theory helps understand the relationship between components of inclusive institutions and the logic behind autocratic stability.

Guns, Lawyers, and Markets: Economic Consequences of Costly Conflict

Stergios Skaperdas (University of California, Irvine)

Abstract : Costly conflict activities are economically very significant, yet the assumption of perfect and costless enforcement of property rights dominates much of economics research. Conflict follows directly from the methodological principle of self-interest and taking it into account in modeling leads to very different findings than in its absence: in straightforward extensions of basic models of exchange, compensation is inversely related to marginal productivity; prices depend on relative power, as well as on preferences, endowments, and technology; exchange itself can be foreclosed by enforcement costs; wage subsidies, land reform and other seemingly inefficient arrangements can be rationalized as appropriate policies in second-best settings; and comparative advantage is distorted in the presence of conflict. Moreover, the costs of conflict are not inevitable as they critically depend on governance and norms. Overall, in the presence of conflict and appropriation Nirvana or first-best models are not empirically plausible. Attributes of modern states such as law, checks and balances, and the bureaucratic form of organization can partly be thought of as restraining conflict and appropriation. These restraints are better than the typical governance alternative, which is personalized, proprietary governance and typically involves autocratic, amateurish, and corrupt rule.