The Political Economics of Innovations

Abstract: We propose a theory that explains variations in the willingness and ability of incumbent political and economic elites to adapt to powerful new ideas, policies, and technologies. Innovations often require substantial changes to existing patterns of social and economic activity and sometimes disrupt existing sources of income and political control. In our model, the elite use fiscal policy and regulation to manipulate prices and redistribute income. They may exploit the innovation themselves, block the innovation, allow it and share the rents with the innovators, or encourage entry to the point that rents are competed away. We focus on structural features of the innovation that determine the elite's optimal policy, driven by expected benefits. We establish the role of the following features of innovations: whether their impact is broad or narrow; whether they complement or compete with the elite's sources of income; whether they are mobile, concealable, and easily replicable; whether they exhibit economies of scale.