Investment without democracy: Ruling-party institutionalization and credible commitment in autocracies

• Published in: Journal of Comparative Economics 2011-06, Vol.39 (2), p.123-139
• Main Authors: Gehlbach, Scott, Keefer, Philip
• Format: Article
• Language: English
• Subjects: Authoritarianism; Autocracy; Capacity E220; Capital; China; Collective action; Corporate Finance and Governance O160; Credible commitment; Dictatorship; Economic Development: Financial Markets; Expropriation; Formal and Informal Sectors; Institutional Arrangements O170; Institutionalization; Investment; Investment Dictatorship Ruling parties Credible commitment; Political parties; Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior D720; Political systems; Property Rights P260; Ruling parties; Saving and Capital Investment; Shadow Economy; Socialist Institutions and Their Transitions: Financial Economics P340; Socialist Systems and Transitional Economies : Political Economy
• ISSN: 0147-5967; 1095-7227
• DOI: 10.1016/j.jce.2011.04.002

► Institutionalized ruling parties discourage expropriatory behavior in autocracies. ► Autocracies with such parties can attract high levels of private investment. ► Institutionalization of the Chinese Communist Party encouraged private investment. What explains private investment in autocracies, where institutions that discourage expropriation in democracies are absent? We argue that institutionalized ruling parties allow autocrats to make credible commitments to investors. Such parties promote investment by solving collective-action problems among a designated group, who invest with the expectation that the autocrat will not attempt their expropriation. We derive conditions under which autocrats want to create such parties, and we predict that private investment and governance will be stronger in their presence. We illustrate the model by examining the institutionalization of the Chinese Communist Party.