Taming the (Not So) Stationary Bandit: Turnover of Ruling Elites and Protection of Property Rights

Leonid Polishchuk Georgy Suynyaev

Higher School of Economics, Moscow

Factors of Property Rights Protection

• History (Acemoglu et al., 2001)• Geography (Sokoloff and Engerman, 2000; Torvik

et al., 2006)• Culture and values (Tabellini, 2008)• Economic conditions and structure (Clague et al.,

1996)• Social and economic inequality (Keefer and Knack,

2002)• Political system

Democracy and Property Rights 

Democracy favors secured property rights (North, Wallis, Weingast, 2009) ...

... but could undermine property rights by yielding to populism or narrow interests (Lizzeri, Persico, 2005)

“Stationary Bandit” as Property Rights Guardian

Both political competition and political monopoly could deliver efficient market-supporting institutions (Acemoglu, Robinson, 2006)

Secured property rights could be upheld by authoritarian regimes (Glaeser et al., 2004)

“Stationary bandit” has the incentive to maintain good investment climate and enabling conditions for private enterprise (Olson, 1993)

Regime Durability and Security of Property Rights

Stable political regimes develop a long-term perspective and can earn significant returns to investments in secured property rights (McGuire, Oslon, 1996). Regime durability could thus be a solution to the credible commitment problem (Besley, Ghatak, 2010)

Data do not support positive association between property rights protection and long political tenure

Post-communist reforms were more successful in countries with quick succession of governments (Hellman, 1998)

Alternatives to Democratic Accountability

Long political tenure does not eliminate a conflict of interest between the society and a “stationary bandit”

Ownership of market assets makes the regime sensitive to the quality of its economic policies (McGuire, Olson, 1996)

Such link however is not automatic since the regime can violate the “equal treatment” assumption (“For my friends – anything, for my enemies – the law”)

Taming of Partially Stationary Bandit

Rotation of ruling elites is a missing link in McGuire-Olson’s argument

Ruling elites’ ownership of substantial market assets that cannot be easily evacuated and non-negligible probability of losing power create the incentives to protect property rights that can substitute for democratic accountability

Such incentives produce a non-democratic surrogate for “property owning democracy” (Rawls, 2001)

Rotation of Ruling Elites and Quality of Institutions: Two Mechanisms

1. Efficiency-enhancing political competition (Stigler, 1972): competing political parties that are vying for voters’ support offer market-supporting institutions that rule out property expropriation

2. Non-democratic mechanism: ruling elites support property rights protection (e.g. by preserving court independence) as an institutional insurance for their own assets in case of losing power

Mechanisms of Property Rights Maintenance 

• Elite settlements (Burton, Higley, 1987) ) • Elite pacts (O’Donnell, Schmitter, 1986) • Constitutional design (Aghion, Alesina, Trebbi,

2004)

Credible commitment without democracy

• Institutionalized ruling parties (Gehlbach and Keefer, 2011)

• Media freedom (Egorov, Guriev, Sonin, 2006)• Economic decentralization (Che and Qian,

1998)• Constraining institutions (Acemoglu et al.,

2005, Besley and Kudamatsu, 2007)

The Model 

  - expropriated share of returns to privately owned assets;  - probability of staying in power for over t years (Poisson process);  - share of assets privately owned by ruling elites

Utility function:

 

Selection of Property Rights Regime 

 

 

 

Model Analysis 

Protection of property rights increases in the turnover rate of ruling elites

The strength of this effect monotonically increases in the size of ruling elites’ market assets

These two factors complement each other in ensuring property rights protection

When Are Property Rights Fully Secure?

When ruling elites’ rotation rates and/or elites’ share of market assets are sufficiently high:

 

Illustration 

lambdaW

Bringing Theory to Data 

Panel comprising 58 developed and developing nations for the period from 1975 through 2005

Data Sources: • Fraser Institute’s Legal Structure and Security of

Property Rights • Database of Political Institutions (Keefer et al., 2010) • Polity IV Database • UNU-WIDER’s World Income Inequality Database

                             

   

Regression Model 

Estimation 1: Full Sample (1) (2) (3) (4) (5)

VARIABLES fullprob_stabns 0.357* 0.331** 0.333** 0.347*** 0.381***

(0.20) (0.14) (0.14) (0.11) (0.11)GDP_per_capita 8.39e-05*** 8.25e-05*** 8.35e-05*** 8.68e-05*** 8.66e-05***

(0.00) (0.00) (0.00) (0.00) (0.00)population 2.37e-06 8.27e-07 8.52e-07 1.13e-06***

(0.00) (0.00) (0.00) (0.00)fuel_export -0.00845 -0.0118* -0.0118* -0.0110*** -0.0115***

(0.01) (0.01) (0.01) (0.00) (0.00)metal_export -0.00453 -0.00694

(0.01) (0.01)secondary_schooling 0.0229*** 0.0237*** 0.0237*** 0.0231*** 0.0222***

(0.01) (0.01) (0.00) (0.00) (0.00)ethnic_frac -0.00235 0.00138 0.000726

(0.01) (0.01) (0.01)leg_british 0.268 -0.0364

(0.37) (0.32)leg_french -0.415 -0.596*** -0.592*** -0.382*** -0.432***

(0.37) (0.15) (0.13) (0.145) (0.13)Observations 247 247 247 286 286Number of id 41 41 41 54 54

Estimation 2: Democratic Accountability or Self-Preservation Instinct 

(1) (2) (3) (4) (5) (6)VARIABLES dem dem dem less dem less dem less demprob_stabns 0.264* 0.260* 0.326* 0.683*** 0.654*** 0.641***

(0.16) (0.157) (0.17) (0.14) (0.14) (0.14)GDP_per_capita 9.06e-05*** 9.13e-05*** 9.41e-05*** 1.76e-05 1.88e-05 2.11e-05

(0.00) (1.48e-05) (0.00) (0.00) (0.00) (0.00)population 9.33e-07** 9.40e-07** 1.01e-06*** -3.54e-07 2.80e-07 3.59e-07

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00)fuel_export -0.0153* -0.0154* -0.0151* 0.00301 0.00327 0.00268

(0.01) (0.01) (0.01) (0.00) (0.00) (0.00)metal_export -0.00648 -0.00656 -0.000993 -0.00474

(0.01) (0.01) (0.01) (0.01)secondary_schooling 0.0199*** 0.0198*** 0.0189*** 0.0206* 0.02 0.0204

(0.01) (0.01) (0.00) (0.01) (0.01) (0.01)ethnic_frac 0.00290 0.00133 -0.00602 0.00513 0.00481

(0.00) (0.00) (0.01) (0.01) (0.02)leg_british -0.207 0.861

(0.22) (0.6)leg_french -0.447*** -0.329*** -0.304*** -0.501

(0.12) (0.09) (0.1) (0.3)Observations 166 166 179 81 81 81Number of id 35 35 41 20 20 20

Estimation 3: The Role of Elites’s Assets (1) (2) (3) (4) (5) (6)

VARIABLES gini>50 gini>50 gini>50 gini<50 gini<50 gini<50prob_stabns 0.628*** 0.567** 0.588** -0.0318 -0.0356 0.0341

(0.22) (0.21) (0.21) (0.21) (0.21) (0.23)GDP_per_capita 7.01e-05* 6.90e-05* 7.04e-05* 7.63e-05*** 8.97e-05*** 0.000116***

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00)population 1.46e-07 2.41e-07 5.24e-07 1.24e-06

(0.00) (0.00) (0.00) (0.00)fuel_export -0.0121 -0.0129* -0.0125* -0.0177*** -0.0207*** -0.0166***

(0.00) (0.01) (0.01) (0.00) (0.00) (0.00)metal_export -0.00657 -0.00769 -0.00420

(0.01) (0.01) (0.01)secondary_schooling 0.0272** 0.0288*** 0.0290*** 0.0157*** 0.0148**

(0.01) (0.01) (0.01) (0.01) (0.01)ethnic_frac 0.00893 0.0115 0.0117 -0.00517 -0.00467 -0.00100

(0.01) (0.01) (0.01) (0.01) (0.01) (0.01)leg_british 0.255 0.132

(0.33) (0.45)leg_french -0.0510 -0.809***

(0.33) (0.24)Observations 119 119 119 127 127 137Number of id 39 39 39 37 37 38

Estimation 4: Direction of Causality VARIABLES

property_rights_1

property_rights_1

property_rights_1

property_rights_1

prob_stabns_1

prob_stabns_1

prob_stabns_0 0.801* 0.946** 0.877* 1.075*(0.75) (0.45) (0.46) (0.95)

property_rights_0 -0.0235 -0.0211(0.02) (0.02)

fuel_export_0 -0.0267*** -0.0248*** -0.0246*** -0.00203** -0.00218**(0.00) (0.00) (0.00) (0.00) (0.00)

leg_french -0.934** -0.851*** -0.835*** -1.528*** 0.0731* 0.0593(0.33) (0.24) (0.23) (0.28) (0.03) (0.04)

secondary_schooling_0 -0.00399 0.00113(0.02) (0.00)

population_0 -8.37e-07 -4.99e-07 -4.26e-07 3.46e-07** 2.92e-07**(0.00) (0.00) (0.00) (0.00) (0.00)

GDP_per_capita_0 0.000145*** 0.000148*** 0.000149*** 0.000119** -4.39e-06** -3.11e-06(0.00) (0.00) (2.30e-05) (0.00) (0.00) (0.00)

leg_socialist

eth_frac_0 -0.00606(0.01)

Observations 45 48 48 42 45 48R-squared 0.737 0.733 0.732 0.686 0.290 0.278

How to Tame a Stationary Bandit? Make Her Less Stationary … 

Rotation of ruling elites and their possession of market assets create incentives conducive for property rights protection

Similar incentives can improve not just economic, but political institutions as well, and ultimately lead to the emergence of representative democracy (Lizzeri, Persico, 2004)