Pampered Bureaucracy, Political Stability, and Trade Integration (working paper)
Stroup, C; Zissimos, B
Date: 1 February 2017
Publisher
CESifo: Center for Economic Studies & Ifo Institute
Abstract
This paper examines the effect of trade integration and comparative advantage on one of a
country’s institutions, which in turn inuences its economic efficiency. The environment we
explore is one in which a country’s lower classes may revolt and appropriate wealth owned by a
ruling elite. The elite can avert revolution by incentivizing ...
This paper examines the effect of trade integration and comparative advantage on one of a
country’s institutions, which in turn inuences its economic efficiency. The environment we
explore is one in which a country’s lower classes may revolt and appropriate wealth owned by a
ruling elite. The elite can avert revolution by incentivizing a potentially productive middle class
to sink their human capital into a relatively unproductive bureaucracy. Thus the bureaucracy
serves as an institution through which the elite can credibly commit to make transfers to the rest
of society, but in the process this reduces economic efficiency. Trade integration alters the
relative value of the elite’s wealth. This alters the lower classes’ incentive to revolt on the one
hand and the elite’s incentive to subsidize participation in the inefficient bureaucracy on the
other. Therefore, the interaction between a country’s comparative advantage and an inefficient
economic institution determines whether trade integration increases or reduces economic
efficiency. The econometric findings support the model’s main prediction.
Economics
Faculty of Environment, Science and Economy
Item views 0
Full item downloads 0