2006/16 | LEM Working Paper Series | |
Unique Equilibrium in a Model of Rule of Law | ||
Randolph Luca Bruno |
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Keywords | ||
Rule of Law, Coordination Failure, Global Games
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JEL Classifications | ||
D81, C72, K42
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Abstract | ||
This paper presents a model of Rule of Law in which a continuum of
agents plays against the State for the appropriation of the economic
assets of a stylised economy. The model shows how each agent can
either challenge the State or acquiesce, with the latter having the
choice of either protecting property rights or abandoning the
economy to anarchy. Players' payoffs are affected by strategic
complementarities, not only between State and agents but also
among agents themselves. As a consequence of this, a
Coordination Failure is generated. The solution of the game is given
by two Pareto-ranked Nash equilibria. Introducing idiosyncratic
information and sequential play generates a unique equilibrium,
according to the global game approach. On the one hand, this model
predicts that high uncertainty and sunk costs in law enforcement
have a negative effect, pushing the economy towards a
Pareto-dominated equilibrium. On the other hand, the high value
given to the economy's assets (embedded social norms) has a positive
influence, leading to a Pareto-dominant equilibrium.
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