Modeling the micro-foundational process to explain potential reasons how through patronage politics inefficient institutions emerge and persist over time. In this model, there are different types of individuals interacting and determining the equilibrium state of economic and political inefficiencies as a choice by the rich elite.

1. Design of the model Theoretical implications
Economics and Politics of Institutions, Prof. Dr. Vera Troeger
Presenter: Nurlan Jahangirli
Emergence and persistance of inefficient states: patronage
politics
Acemoglu, Ticchi, and Vindigni (2011)
11. January 2021
Acemoglu, Ticchi, and Vindigni (2011) Emergence and persistance of inefficient states: patronage politics

2. Design of the model Theoretical implications Economic environment Political environment Timeline of dynamics
Introduction
A principal-agent model to demonstrate the emergence of the inefficient state
through patronage politics.
According to the following model, patronage politics and the creation of an
inefficient state are the only way for the rich to increase their votes and influence
in politics.
Purpose is to isolate a particular mechanism– namely patronage politics– that
appears to be important in practice and investigate its implications
It models the mechanism of an elite creating an inefficient state structure to
maintain their political power in the face of an emerging democracy.
Commitment and credibility problems are at the center of this theory of
emergence and persistence of inefficient states.
Markov Perfect Equilibrium (MPE) is used which makes less use of the past
public history (ht ) and helps to find more deterministic findings (avoiding sunspot
equilibria). Specifically, a Markov strategy depends only on payoff- relevant past
events.
Acemoglu, Ticchi, and Vindigni (2011) Emergence and persistance of inefficient states: patronage politics

3. Design of the model Theoretical implications Economic environment Political environment Timeline of dynamics
Economic environment 1/2
Risk-neutral population where cj
t denotes the consumption of agent j in t, Gt is
the level of public good, ej
t is the effort decision of the agent, and h > 0 is the
cost of exerting an effort.
E0
∞
t=0
βt
(cj
t + Gt − hej
t )
Acemoglu, Ticchi, and Vindigni (2011) Emergence and persistance of inefficient states: patronage politics

4. Design of the model Theoretical implications Economic environment Political environment Timeline of dynamics
Economic environment 2/2
Two occupations in the economy: i) producer and ii) bureaucrat.
Two types of agents: a) with n > 1/2 poor (low-skill) and b) with 1 − n rich
(high-skill) agents. Poor and rich are denoted by the symbol L and H.
Poor and rich agents’ income are skill level dependent AL and AH , with AH > AL.
Linear regressive tax rate τ ∈ [0, 1] is imposed on earned incomes to finance
government expenditure in infrastructure (K), public goods (Gt ) and the wages
of bureaucrats (wt , with wt ≥ 0) .
Bureaucrats at time t are defined by Xt . The role of bureaucrats is tax collection
and only poor agents can become bureaucrats.
An individual can try to evade taxes and s/he gets caught with p(xt ) probability,
where xt denotes the number of bureaucrats exerting positive effort:
xt =
j∈Xt
ej
t dj.
Acemoglu, Ticchi, and Vindigni (2011) Emergence and persistance of inefficient states: patronage politics

5. Design of the model Theoretical implications Economic environment Political environment Timeline of dynamics
Political environment 1/2
A bureaucrat can avoid exerting effort and gets caught with probability
qt = q(It−1).
The probability of detection qt depends on the organization of the state,
represented by It ∈ 0, 1. When q(I = 1) = 1, the state is efficient (I = 1) and
perfectly monitors bureaucrats. On the other side, when q(I = 0) = q0 < 1, the
state organization is inefficient (I = 0) and an imperfect monitoring of
bureaucrats.
At each date, the political system chooses (i) a tax rate on all earned income τt ,
(ii) the wage rate for bureaucrats wt , (iii) a level of public good Gt , (iv) the
number of bureaucrats hired Xt , and (v) the efficiency of the state for the next
date It . Thus, determining the policy vector.
Note that the efficiency of the state at the current date t (It−1) is a state variable
determined by choices in the previous period.
Acemoglu, Ticchi, and Vindigni (2011) Emergence and persistance of inefficient states: patronage politics

6. Design of the model Theoretical implications Economic environment Political environment Timeline of dynamics
Political environment 2/2
Three different political environments:
1 Permanent Non-democracy: the rich elite are in power at all dates.
2 Permanent Democracy: the citizens, who form the majority, are in power at all dates
starting at t = 0.
3 Emerging Democracy: the rich elite are in power at t = 0, and in all future dates the
regime will be democratic with majoritarian elections
Two parties, one run by a poor agent (denoted by P) and one run by an elite
agent (denoted by R), and bureaucrats cannot run for office. Notation dt = P
indicates that party P is elected to office at date t.
All individuals vote, vj
t ∈ {P, R}
Whichever party receives the majority of the votes comes to power and the agents
in control of the party chooses the policies that maximizes her/his own utility
through a policy vector ρ ≡ (τt , wt , Gt , Xt , It )
As government revenue, bureaucrats collect τt (AL + AH ).
Acemoglu, Ticchi, and Vindigni (2011) Emergence and persistance of inefficient states: patronage politics

7. Design of the model Theoretical implications Economic environment Political environment Timeline of dynamics
Timing of the events
The society start with some political regime, a set of agents who are already
bureaucrats, and a level of efficiency of the state (It−1 ∈ {0, 1}). Then, the
following occurs:
0 1
A
llindividuals
vote
2
Policy
vector
decided
3
B
ecom
ing
a
bureaucrat
4
B
ureaucrats’effort
choice
5
Tax
evasion
decision
m
ade
6
p(xt)
tax
evaders
caught
7
qt
shirking
bureaucrats
Public
service
provided
t
Acemoglu, Ticchi, and Vindigni (2011) Emergence and persistance of inefficient states: patronage politics

8. Design of the model Theoretical implications Preliminary results Dynamics of political and economic environments
Incentive compatibility constraint (ICC) and participation constraint (PC)
By ICC, post-tax income must be greater than expected income from tax evasion so
that individuals decide not to evade, i.e. (1 − τt )Aj ≥ (1 − p(xt ))Aj . Reduced, this
ICC becomes: p(xt ) ≥ τt , where π(τ) ≡ p−1(τ). Thus, ICC of producers:
xt ≥ π(τt ). (1)
ICC of bureaucrats is necessary and sufficient to ensure that all bureaucrats choose to
exert effort:
wt ≥
h
qt
. (2)
Bureaucrats should receive at least as much as they would obtain in private
production. Hence, PC of (poor) individuals to choose becoming a bureaucrat:
wt ≥ (1 − τt )AL
+ h. (3)
Acemoglu, Ticchi, and Vindigni (2011) Emergence and persistance of inefficient states: patronage politics

9. Design of the model Theoretical implications Preliminary results Dynamics of political and economic environments
Government budget constraint
In any equilibrium ICC of producers and bureaucrats, and PC of bureaucrats are
satisfied. Therefore, the government budget constraint can be written as
K + Gt + wt Xt
Government expenditure
≤ (1 − n)τt AH
+ (n − Xt )τt AL
Government revenue
(4)
Acemoglu, Ticchi, and Vindigni (2011) Emergence and persistance of inefficient states: patronage politics

10. Design of the model Theoretical implications Preliminary results Dynamics of political and economic environments
Emergence and persistence of an inefficient state under democracy 1/3
In a MPE, dt = R, that is the rich will win the election, if It−1 = 0,
(1 − q0)
h
q0
> (1 − τD)AL
+ GD
+
1 − β
β
ˆGD, (5)
and
Xt ≥ n −
1
2
. (6)
Condition 6 requires the size of the bureaucracy to be sufficient to give the
majority to party R when all bureaucrats vote with the rich.
Party R can win an election only if X ≥ n − 1/2, thus, over-employment of
bureaucrats to generate sufficient votes from the bureaucrats. If X > π(τE ), then
this over-employment creates an unnecessarily large number of bureaucrats
necessary for tax inspection.
Acemoglu, Ticchi, and Vindigni (2011) Emergence and persistance of inefficient states: patronage politics

11. Design of the model Theoretical implications Preliminary results Dynamics of political and economic environments
Emergence and persistence of an inefficient state under democracy 2/3
In order for the rich to prefer the inefficient state organization, the following must hold:
(τD − τE
t )AH > GD, if τE
t ≥ ˆτt
E
(1 − ˆτt
E
)AH > (1 − β)(1 − τE
t )AH + β[(1 − τD
t )AH + GD], if τE
t < ˆτt
E (7)
where τE is tax rate that party R needs to have to balances the government budget
when the minimum number of bureaucrats necessary to avoid tax evasion. By
definition, ˆτE > τE .
Only then, in a political environment with emerging democracy, the rich elite
choose It = 0forallt ≥ 0. Thus, the rich party R always remains in power and the
following policies are implemented:
1 wt = h/q0, Xt = max{π(τE
), n − 1/2}, Gt = GE
≡ 0, and τ = max{τE
, ˆτE
}.
2 Thus, the rich, who are in power at time t = 0, may choose an inefficient state
organization and a large (inefficient) bureaucracy as a way of credibly committing to
providing rents to bureaucrats.
3 This enables them to create a majority coalition consisting of themselves and the
bureaucrats, and thus capture democratic politics (low redistribution, low provision of
public goods, but high rents for bureaucrats).
4 Thus, the inefficient state institutions persists and the rule of the rich continue.
Acemoglu, Ticchi, and Vindigni (2011) Emergence and persistance of inefficient states: patronage politics

12. Design of the model Theoretical implications Preliminary results Dynamics of political and economic environments
Emergence and persistence of an inefficient state under democracy 3/3
If either large number of bureaucrats (condition 6) or incentive for the rich to
sustain an inefficient state (condition 7) are not satisfied, then dt = P and It = 1
with a policy vector in favor of the poor.
The presence of inefficient state institutions creating rents for the bureaucrats
that induce them to support the policies of the rich is the main inter-linkage,
according to Acemoglu, Ticchi, and Vindigni (2011), in emergence and
persistence of inefficient state organizations.
Acemoglu, Ticchi, and Vindigni (2011) Emergence and persistance of inefficient states: patronage politics

13. Design of the model Theoretical implications Preliminary results Dynamics of political and economic environments
Conclusion and questions
The role of state capacity (or lack thereof) is crucial in explaining why some
societies are able to industrialize and modernize.
In this model:
1 The organization of the public bureaucracy is manipulated by the rich elite in order to
influence redistributive politics.
2 By instituting an inefficient state structure, the elite are able to use patronage and
capture democratic politics.
3 Then, too little public good provision and over-employment of bureaucrats.
Why the role of bureaucrats is only tax collection? Why only poor agents can
become bureaucrats?
The paper explains the emergence and persistence of inefficient institutions
starting from the date t = 0 when dt = R but not the transition from dt = P to
dt +1 = R.
What about rigged elections (electoral fraud)?
Even without the conditions 6 and 7, many countries across the world sustain the
inefficient state organization.
Acemoglu, Ticchi, and Vindigni (2011) Emergence and persistance of inefficient states: patronage politics

14. Design of the model Theoretical implications Preliminary results Dynamics of political and economic environments
Additional: Regime change
At date t = 0, the rich are in power and from there on there will be elections.
1 In a MPE, if dt = R and It−1 = 1, then wt = (1 − τN )AL + h, Xt = π(τN ),
Gt = GN ≡ 0, and τN .
2 If dt = P for all t ≥ t, and equilibrium policies at all dates t ≥ t are given by
political regime under permanent democracy, namely efficient institutions
achieved.
Once the party of the poor wins an election, they will choose their preferred policy
vector, which includes It = 1.
Bureaucrats will start supporting the poor in all future period since they can be caught
when shirking and have no incentive to support the rich. No rent to bureaucrats.
3 If It−1 = 0, then wt = h/q0. Besides, if dt = R, then Gt = GE ≡ 0. And if
dt = P, then Gt = ˆGD given by the solution to the following maximization
program:
max
τ,G
(1 − τ)AL
+ G
subject to G = (1 − n)τAH
+ [n − π(τ)]τAL
−
h
q0
π(τ) − K (8)
Acemoglu, Ticchi, and Vindigni (2011) Emergence and persistance of inefficient states: patronage politics