Persistence of Power, Elites and Institutions

We construct a model of simultaneous change and persistence in institutions. The modelconsists of landowning elites and workers, and the key economic decision concerns the formof economic institutions regulating the transaction of labor (e.g., competitive markets versuslabor repression). The main idea is that equilibrium economic institutions are a result of theexercise of de jure and de facto political power. A change in political institutions, for examplea move from nondemocracy to democracy, alters the distribution of de jure political power,but the elite can intensify their investments in de facto political power, such as lobbying orthe use of paramilitary forces, to partially or fully offset their loss of de jure power. In thebaseline model, equilibrium changes in political institutions have no effect on the (stochastic)equilibrium distribution of economic institutions, leading to a particular form of persistence inequilibrium institutions, which we refer to as invariance. When the model is enriched to allowfor limits on the exercise of de facto power by the elite in democracy or for costs of changingeconomic institutions, the equilibrium takes the form of a Markov regime-switching processwith state dependence. Finally, when we allow for the possibility that changing political institutionsis more difficult than altering economic institutions, the model leads to a pattern ofcaptured democracy, whereby a democratic regime may survive, but choose economic institutionsfavoring the elite. The main ideas featuring in the model are illustrated using historicalexamples from the U.S. South, Latin America and Liberia.