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Asymmetric Information and Inefficient Regulation of Firms Under the Threat of Revolution

Paul Maarek (), Michael Dorsch () and Karl Dunz
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Michael Dorsch: The American University of Paris

No 2012-42, THEMA Working Papers from THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise

Abstract: This paper considers the role of asymmetric information in a political agency theory of autocratic economic policy-making. Within the context of a static game, we analyze the strategic interaction between a self-interested elite ruling class, who may extract rent ineciently through hidden regulations, and an imperfectly informed disenfranchised class, who may choose to revolt. In various models, we identify the Perfect Bayesian Equilibrium (PBE), which we describe in terms of the economy's level of development potential. One model has two-sided uncertainty and a cost of regulation. This model has a PBE such below a threshold development level the elite chose inefficient regulation and above the threshold development level the elite chose the efficient policy. A further extension where the elite own assets allows for a voluntarily transition to democracy.

Keywords: Political transition; Revolution; Asymmetric information; Perfect Bayesian equilibrium (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-cta, nep-pol and nep-reg
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