In this paper, we suggest a new rationale for the existence of interlinked contracts in the agrarian economies of developing countries. Using the framework of an infinitely repeated game with discounting, we show that interlinked contracts can help the dominant parties to collude, in cases where collusion is not possible with noninterlinked contracts. This occurs because either interlinkage pools incentive constraints across markets, or it affects the incentives of agents to accept deviating contracts. We illustrate these mechanisms by considering the case of interlinkage between markets for credit and share tenancy. The model that is used to formalize the second mechanism is characterized by frictions in the tenancy market, which we model using the standard framework of search and matching.
The question of who guards the guards is intimately connected with broader questions of state capacity and the establishment of a monopoly of violence in society, something which is often viewed as the defining feature of the modern state. But to establish such a monopoly, civilian rulers need not only to build an effective military, but also to control it. In this paper we study how governments may solve this problem when they recognize that their decisions to build a strong army may have ramifications for subsequent coups.
Acemoglu, Daron, and James A Robinson. 2010. Why is Africa Poor?. Economic History of Developing Regions 25, no. 1 June 2010: 21-50 .Abstract
In this paper we take for granted that the poverty of Sub-Saharan Africa is to a large part explained by its political and economic institutions. As citizens Africans do not have the incentives to save and invest, as politicians they do not have the incentive to provide public goods. We focus on the issue of how Africa developed such institutions. Historically, no society had the types of institutions required for modern economic growth, though a few had elements of them for quite long periods. Growth arose when institutional transitions took place. We argue that the historical dynamics of institutions in Africa have been different. Processes of state formation seem to have been delayed relative to Eurasia, and state institutions appear to have been intensely absolutist and patrimonial. These initial institutions interacted in a perverse way with a series of shocks that hit Africa, in particular the slave trade in the early modern period, and colonialism in the 19th and 20th centuries. Africa countries emerged at independence with a complex path dependent set of institutions that were probably even worse than those which they had at the time of colonization. It was these that precipitated authoritarianism, sustained economic decline and reinforced the poverty we see in Africa today.
In this paper we investigate empirically whether or not the notion of an enclave adds substantially to existing knowledge of the determinants of long-run economic, political, or institutional development. We discuss the prominent place of enclaves in historical accounts in the dependent development literature, particularly in the work of Cardoso and Faletto (1966, 1979) and the large difficulties of determining in practice whether or not a country was or was not an enclave. We find little evidence for a relationship between past enclave status and long-run growth, inequality, or the size of the government. However, there does seem to be some preliminary evidence that countries that were enclaves have greater state capacity than non-enclaves and have been less democratic in the post-WWII period.
In this paper I argue that the most important consequences of the current economic crisis for developing countries will not be the direct negative economic effects, which have received the most attention. More important are the induced effects on politics, policy and institutions. In this context I ask: can the crisis provide opportune circumstances for developing countries to reform their institutions? Such a claim is implicit in the discussion by the Obama administration of not wanting to "waste a good crisis" and it is supported by a large social science literature on the implications of crisis for policy reform. I argue, however, that while there exists an optimistic scenario, there is also a pessimistic scenario. I illustrate both scenarios by examining the history of policy and institutional reform in the great depression of the 1930s and show that the consequences of this crisis for policy were very different in independent developing countries than they were in developed countries. I also argue that the recent experience of policy reform since the 1980s in fact provides less support for the "good crises" hypotheses than is commonly believed. Crises may be good or bad, depending on the nature of the political equilibrium in the societies they hit. I conclude with some speculation about Sub-Saharan Africa: though the most likely scenario is that the current shock is not large enough to change the institutional equilibrium in developing countries, if it were, there are circumstances which are consistent with the optimistic scenario.
Why do soft budget constraints exist and persist? In this paper we argue that the prevalence of soft budget constraints can be best explained by the political desirability of softness. We develop an infinite horizon political economy model where neither democratic nor autocratic politicians can commit to policies that are not ex post optimal. We show that because of the dynamic commitment problem inherent in the soft budget constraint, politicians can in essence commit to make transfers to entrepreneurs which otherwise they would not be able to do. This encourages such entrepreneurs to support them politically. Though the soft budget constraint may induce economic inefficiency, it may be politically rational because it influences the probability of political survival. In consequence, even when information is complete, politicians may fund bad projects which they anticipate they will have to bail out in the future. We show that, maybe somewhat surprisingly, dictators who are less likely to lose power, are more likely to use the soft budget constraint as a strategy to gain political support.