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

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 an elite ruling class that sets policy and an imperfectly informed disenfranchised class, who may choose to revolt. We identify the Perfect Bayesian Equilibrium (PBE), which need not be pure strategies. We enrich the basic model in an extension that includes two-sided uncertainty and introduces an additional constraint on the elite's policy decision. The extended model features pure strategies in the PBE, which can include inefficient policy choices and revolution. We char- acterize the equilibrium strategies in terms of the economy's level of development.