Dictatorship, Democracy, and Exit

The argument for democracy over dictatorship is often made on second-best grounds. Given the possibility of self-interested leaders, opportunities for predation are decreased by distributing political authority among a number of individuals. This second-best argument loses cogency under conditions of strong interjurisdictional competition for mobile residents, however, since benevolence effectively becomes endogenous to the competitive environment. I here present a simple formal model which considers the degree of predation under dictatorship and democracy given varying exit costs. A self-interested dictator will maximize profit, but in increasing the tax rate also needs to consider the effect of taxation on productivity. As citizen exit becomes less costly, the marginal effect of tax rates on tax revenues increases and the dictator is forced to reduce extraction. Democratic institutions make extraction more costly, but also spread extractive power more widely and weaken then incentive to reduce extraction in response to competitive pressure. With sufficient competition, an endogenously benevolent dictator will extract less than the aggregate of democratic factions. This analysis sheds light on the economic success of authoritarian countries such as Singapore and has important implication for emerging models of subnational governance such as charter cities and special economic zones