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Political and Economic
Development in the Face of
Revolutionary Threats
Bruce Bueno de Mesquita
Alastair Smith
NYU
What should the Western World do
to improve the welfare of the
world’s poor?
• Sachs– Give more aid
– Past failures due to too small donations
• Easterley – Aid giving problematic
– “big plan” mentality of donors undermines the benefits
• Our Answer
– Aid gives leaders the resources to solve societal
problems ….
– But incentives to do the opposite
Selectorate Model
• Selectorate politics
– Office seeking leaders use private (z) and
public (g) goods to reward supporters
– Leader needs to maintain the support of W
supporters from a pool of S potential
supporters
– Large W induces public goods focus
– Small W induces private goods focus, loyalty
norm and easy leader survival
Basic Selectorate Intuition
• R resources


vguzmaxv
gu
zsubject to pg Wz R
• Equilibrium policies
• Coalition size shapes public/private ratio
• Incumbency Constraint:
p
FOC: v g 
g W u z 
z
– Incumbent provides vg uzeach period

  
1


g WS u
z 
  1

v
g


u
z


vguz 1 v

•Incumbency Advantage
Two Aid Related Projects
1: Aid-for-Policy deals
– Leader A buys policy concession from leader
B in exchange for resources (a.k.a. AID)
– Leaders only accept deals that improve their
survival
– Size of required aid deal increases in WB
– Competing effects:
• Poor Small W receive little aid, but
• High probability of aid
– Donors are rich, Large W systems
2: Effects of Aid on Political and Economic
Development
Innovations
• Structure of the economy
– Productivity depends upon public goods
• Public goods = productive economic activity-Φ(g)
– Free Resources
• Oil, natural resources, AID
• Government revenues without “Economic Consent”
– Total Resources: Nr
gR
• Endogenous Institutional Change
– Revolutions
• Desire to increase coalition size
• Revolutionary success ρ(g) increases with public goods
– Elsewhere also model Coups
Aid Absent a Revolutionary Threat
• Two conditions


nr


g
p
g
 


FOC
g , z v g 
g 
u

z
0
z
W
25



W

Select
g , zv
g u
zvguz1

1


u
z
0

S
dg 
dR
15
20
Large coalition:
steeper slope,
larger intercept
10
Small
coalition
0
100
200
300
Free Resources, R0
400
500
0
d2g
dWdR
0
Institutional Preferences
High R
Welfare
24
Coalition
22
Low R
20
18
Citizens
16
1000
2000
3000
Coalition Size, W
4000
5000
Effects of Aid (or other free resource)
• Political Use of Free Resources, R
– Large W – Aid funds public goods
• Aid improves economy and societal welfare
– Small W – Leader diverts aid
• Aid improves wealth of leader and insiders
– As R increases – revolution becomes more
attractive to obtain the public goods it could
fund
Revolutionary Threat
• Expected value of revolution, Δ
• Probability of success, ρ(g)
• Cost of rebelling, k
Rebel
g 
g



1


1 v
g vg D uz D k

0
Policy Response to Revolution
Policies
absent
revolution
20
Rebel(g)
10
Contract g
50
Low R
High R
Expand g
100
150
200
-10
250
Public goods, g
-20
dRebel
dg


1
1
g 1
v
g
v
g

u
z




v 
g
D
D

1 g
Expand Public Goods: Easier to rebel but less desire to do so
Contract Public Goods: Fewer means to coordinate
g solves Rebel(g)=0, z the solves Select(g,z)=0
FOC not binding
Contraction vs. Expansion
• Expansion of g
– Increase economy
– Reduce private goods (attractive if W relatively large)
– Small R, relatively large W
• Contraction of g
– Contract economy
– Need extra private goods (hard without Free
resources)
– Small W, large R
25
Policy Response
20
Expansionary
response to
revolutionary threat
15
Large W
Small W
10
Contractionary
response to
revolutionary threat
0
100
300
200
Free Resources, R0
400
500
Endogenous Institutional Choice
• Rebellions by outsiders to increase W
• Coups by a subset of W (to reduce W/S)
• Leader’s institutional changes
– Rationalize Institutions with the Policies!
Conclusion
• Multiple threats to leader survival
• Free resources affects
– Which threats are binding constraints on policy
– Best policy response
• Foreign Aid
– Resources to finance public goods production
• In large W Aid promotes public goods
• In small W Aid rewards leader and coalition
• Increases revolutionary threat which encourages public
goods suppression
Coordination Good(t+5)
Credible
Revolutionary
Threat: Mass>0
W<1
Incredible
Revolutionary
Threat:
Mass<0
W<1
Credible
Revolutionary
Threat: Mass>0,
DemocracyAutocracy<1
Incredible
Revolutionary
Threat: Mass<0,
DemocracyAutocracy<1
Coordination
Goods(t0)
0.495 (0.030) 0.000
0.489 (0.066)
0.000
0.395 (0.034)
0.000
0.376 (0.072)
0.000
W or
Polity
-0.089 (0.080) 0.267
-0.175 (0.130)
0.179
0.239 (0.061)
0.000
0.078 (0.100)
0.432
OIL (exports as
% of GDP)
-0.009 (0.002) 0.000
-0.012 (0.004)
0.002
-0.006 (0.001)
0.000
-0.011 (0.003)
0.000
W*OIL
0.012 (0.003) 0.002
0.010 (0.009)
0.288
0.006 (0.002)
0.017
0.011 (0.006)
0.061
AID (% of
GDP)
-0.105 (0.061) 0.084
-0.002 (0.105)
0.984
-0.082 (0.047)
0.081
-0.063 (0.087)
0.472
W*AID
0.124 (0.110) 0.259
0.009 (0.178)
0.960
0.133 (0.087)
0.125
0.121 (0.136)
0.375
Ln(GDP) per
capita
0.041 (0.016) 0.012
0.092 (0.026)
0.001
0.047 (0.015)
0.002
0.086 (0.025)
0.001
Ln(Population)
0.017 (0.011) 0.123
0.039 (0.018)
0.033
0.013 (0.011)
0.216
0.030 (0.017)
0.090
Year
-0.002 (0.002) 0.231
0.000 (0.004)
0.946
-0.006 (0.002)
0.008
-0.003 (0.004)
0.482
Constant
4.781 (4.163) 0.251
-1.301 (7.199)
10.743 (4.153)
4.383 (7.146)
Dependent Variable: W(t+5) or Democracy-Autocracy(t+5)
Credible Revolutionary
Threat: Mass>0
W<1
Ordered Logit
Winning Coalition
W(t0)
2.413 (0.186)
0.000
Incredible Revolutionary
Threat: Mass<0
W<1
Ordered Logit
Credible Revolutionary
Threat: Mass>0,
DemocracyAutocracy<1
Incredible Revolutionary
Threat: Mass<0,
DemocracyAutocracy<1
0.677 (0.023)
0.000
0.653 (0.035)
0.000
2.090 (0.264)
0.000
Polity DemocracyAutocracy
OIL (exports as % of
GDP)
-0.032 (0.005)
0.000
-0.011 (0.008)
0.188
-0.004 (0.001)
0.000
-0.004 (0.001)
0.001
W*OIL
0.046 (0.010)
0.000
0.004 (0.020)
0.828
0.006 (0.001)
0.000
0.003 (0.002)
0.184
AID (% of GDP)
-0.237 (0.145)
0.102
-0.027 (0.227)
0.906
-0.041 (0.020)
0.047
-0.019 (0.035)
0.589
W*AID
0.319 (0.264)
0.226
0.035 (0.388)
0.927
0.057 (0.038)
0.132
0.023 (0.535)
0.670
Ln(GDP) per capita
0.221 (0.038)
0.000
0.323 (0.055)
0.000
0.023 (0.006)
0.000
0.049 (0.009)
0.000
Ln(Population)
0.089 (0.026)
0.001
0.058 (0.036)
0.113
0.015 (0.004)
0.001
0.011 (0.006)
0.101
Year
0.029 (0.003)
0.000
0.028 (0.005)
0.000
0.006 (0.001)
0.000
0.005 (0.001)
0.000
NA
NA
-11.158 (1.142)
0.000
-10.140 (1.650)
0.000
1297, 737.68, 0.20
606, 264.01, 0.17
1287, 355.58, 0.69
620, 139.72, 0.65
Constant
N, Χ2, Pseudo R2 or
N, F, R2
Table 3: Out of Sample test: Changes in
Governance, Free Resources, and
Revolutionary Threats
for nations with high free resources
Governance
Improved
Governance
Unchanged
Governance
Declined
Growing
1
Revolutionary
Threat (Mass >
0)
11
14
Declining
10
Revolutionary
Threat (Mass <
0)*
13
4