The Rise of Inclusive Political Institutions and Stronger Property Rights: Time Inconsistency Vs. Opacity.

Abstract

Despite the economic relevance of strong political and property rights, we still lack an organic and empirically sound theory of their origins and interaction. In our model, the elite can elicit the nonelite's cooperation in investment by enacting a more inclusive political process, which allows the latter to select the tax rate and organize public good provision, and by punishing suspected shirking through the restriction of private rights. When the expected investment return is small, cooperation can only be attained under strong political and property rights and full taxation. When it is intermediate, the elite keeps control over fiscal policies and can implement partial taxation. When, finally, the expected investment return is large, the elite can also weaken the nonelite's private rights. Embracing the stick, however, is optimal only if production is sufficiently transparent and, thus, punishment effectively disciplines a shirking nonelite. These predictions are consistent with novel data on the division of the decision-making power, strength of the farmers' rights to land, provision of public goods and geographic conditions determining the expected return on farming and its opacity in a panel of 44 major Mesopotamian polities spanning each half-century between 3050 and 1750 BCE. Crucially, our estimates are similar when we also control for trade potential, severity of external and internal conflicts and degree of urbanization.