Evolution of Risk and Political Regimes
Abstract: We analyze the interaction between a government and citizens in which, in each period, the government has an option to predate. Citizens prefer a government that is competent and non-predatory and strive to replace a government if it is in their interests to do so. Regimes differ in the degree to which citizens can succeed in doing so. In pure democracies, they displace incumbent regimes; in pure autocracies, they cannot; and in intermediate cases, they can do so in probability. After economic downturns, the posterior probability that the government is competent and benevolent declines. According to the model, in intermediate regimes, but not in others, governments can separate by type. The implication, then, is that they are politically and economically more volatile, with higher levels of variation in assessments of political risk and in economic performance. We test our argument by measuring the impact of economic downturns on the perceived risk of political expropriation n different regime types, using as instruments the incidence of natural disasters and unexpected terms of trade shocks.