A model of equilibrium institutions

In order to understand inefficient institutions, one needs to understand what mightcause the breakdown of a political version of the Coase Theorem. This paper considersan environment populated by ex-ante identical agents and develops a model of powerand distribution where institutions (the \rules of the game") are set to maximize payoffsof those individuals in power. They are constrained by the threat of rebellion, where anyrebels would be similarly constrained by further threats. Equilibrium institutions arethe fixed point of this constrained maximization problem. This model can be appliedto different economic environments. Private investment depends on credible limitationson expropriation, which can only be achieved if power is not as concentrated as thosein power would like it to be, ex-post. Endogenously, this enables the group in power toact as government committed to protection of property rights, which would otherwisebe time inconsistent. But the \political" Coase Theorem does not hold. Since sharingpower implies sharing rents, capital taxation is inefficiently high.[...]