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T-Space at The University of Toronto Libraries >
Theoretical Economics >
Volume 5, Number 1 (January 2010) >

Please use this identifier to cite or link to this item: http://hdl.handle.net/1807/18351

Title: Capitalist investment and political liberalization
Authors: Roger B. Myerson; Department of Economics, University of Chicago
Keywords: Political liberalization, resources curse, expropriation risk
D72
Issue Date: 26-Jan-2010
Publisher: Theoretical Economics
Citation: Theoretical Economics; Vol 5, No 1 (2010)
Abstract: [This item is a preserved copy. To view the original, visit http://econtheory.org/] We consider a simple political-economic model where capitalist investment is constrained by the government's temptation to expropriate. Political liberalization can relax this constraint, increasing the government's revenue, but also increasing the ruler's political risks. We analyze the ruler's optimal liberalization, where our measure of political liberalization is the probability of the ruler being replaced if he tried to expropriate private investments. Poorer endowments can support reputational equilibria with more investment, even without liberalization. So we find a resources curse, where larger resource endowments can decrease investment and reduce the ruler's revenue. The ruler's incentive to liberalize can be greatest with intermediate resource endowments. Strong liberalization becomes optimal in cases where capital investment yields approximately constant returns to scale. Adding independent revenue decreases optimal liberalization and investment. Mobility of productive factors that complement capital can increase incentives to liberalize, but equilibrium prices may adjust so that liberal and authoritarian regimes co-exist.
URI: http://hdl.handle.net/1807/18351
Other Identifiers: http://econtheory.org/ojs/index.php/te/article/view/20100073
Rights: Authors who publish in <i>Theoretical Economics</i> will release their articles under the <a href="http://creativecommons.org/licenses/by-nc/2.5/">Creative Commons Attribution-NonCommercial license</a>. This license allows anyone to copy and distribute the article for non-commercial purposes provided that appropriate attribution is given.
Appears in Collections:Volume 5, Number 1 (January 2010)

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