Abstract
AbstractDespite received wisdom that long time horizons and formal institutions can induce private investment under dictatorship, there is substantial investment even in relatively unconstrained regimes. This paper provides a novel explanation for the puzzle of investment in these regimes: economic elites’ uncertainty over expected investment returns under plausible alternative authoritarian successors. We construct a noisy signaling model that captures how uncertainty over which type of authoritarian successor will rule next and uncertainty in the truthfulness of policy promises made by potential autocratic successors might provide incentives for elite investment.
Highlights
Existing research offers several principal explanations for private investment under dictatorship
Perhaps most prominent are explanations that emphasize long time horizons and an encompassing interest in growing the economy as a whole, and explanations that emphasize institutionalization as a way to tie the hands of the dictator and thereby reduce the likelihood of arbitrary predation on private economic actors
Motivated by numerous cases of significant private investment under relatively unconstrained dictators that lack very long time horizons, this paper highlights a different and original explanation: that uncertainty over expected economic returns under plausible alternative authoritarian successors can provide incentives for private actors to invest under a current authoritarian regime even when expropriation risk is far from negligible
Summary
Several strands of literature seek to explain private investment under dictatorship. One prominent and longstanding explanation is that dictators with long time horizons have incentives to stoke investment and growth rather than predate on citizens in order to grow the size of the economy, and with it the size of their rents (Olson 1993, Wintrobe 1998). Time horizons are in turn linked with age and time in office. The first set of dictatorships are those that face institutional constraints in the form of a functioning legislature or one or more dominant, institutionalized political parties, as well as monarchies, which are expected to have especially long time horizons even absent these institutions (Herb 1999).. 33% of the dictatorship-years of institutionally unconstrained dictatorships have higher rates of private investment than the average under institutionally constrained dictatorships In many of these cases, dictators are not especially long-lived, and are unlikely to have had long time horizons and an encompassing interest in the economy. Signaling in such an environment becomes a relevant mechanism for elites to attempt to decipher the type of potential autocrats that might rise to power
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