We study the structure of non-linear taxes in a dynamic economy subject to political economy problems. In contrast to existing literature, taxes are set by a self-interested politician, without any commitment power, who is partly controlled by the citizens. We prove that: (1) a version of the revelation principle applies; and (2) the provision of incentives to politicians can be separated from the provision of incentives to individuals. Using these results, we provide conditions under which distortions created by political economy problems persist or disappear. We then extend these results to environments with partially benevolent governments and potential ex post conflict among the citizens.

We study the determinants of vertical integration in a new data set of over 750,000 firms from 93 countries. We present a number of theoretical predictions on the interactions between financial development, contracting costs, and the extent of vertical integration. Consistent with these predictions, contracting costs and financial development by themselves appear to have no effect on vertical integration. However, we find greater vertical integration in countries that have both greater contracting costs and greater financial development. We also show that countries with greater contracting costs are more vertically integrated in more capital-intensive industries.

We study the determinants of vertical integration in a new data set of over 750,000 firms from 93 countries. We present a number of theoretical predictions on the interactions between financial development, contracting costs, and the extent of vertical integration. Consistent with these predictions, contracting costs and financial development by themselves appear to have no effect on vertical integration. However, we find greater vertical integration in countries that have both greater contracting costs and greater financial development. We also show that countries with greater contracting costs are more vertically integrated in more capital‐intensive industries.

January 2009Although almost half of the world™s population lives under nondemocratic regimes, thequestions of how policy decisions are made and how power changes hands in nondemocra-cies have received relatively little attention in the political economy literature. A popularview, forcefully articulated by Gordon Tullock (1987), is that because there are no stronginstitutions ensuring consensus and regulating the election and succession of leaders, non-democratic regimes rapidly degenerate into personal rule, where a single dictator dominatesevery aspect of decision-making. Tullock writes: fiEmpirically the Junta characteristicallyshrinks to one man...fl(p. 144) and continues to explain this as the result of dynamic in-teractions among the members of the junta. He suggests that there will typically be anaccumulation of power by one of the junta members. If this upstart member succeeds, hebecomes the sole ruler. If he fails, he is eliminated by the other members of the junta.This process continues until one member is standing. Tullock thus concludes: fiIt can beseen that this process would tend over time to lead the junta into becoming just one manthrough the gradual exclusion of individuals who had failed in plotting or the success of anindividual who had not.fl(p. 145)Tullock™s account, like that of many others, implicitly recognizes that politics in non-democratic and weakly-institutionalized societies should be conceptualized as one of thedynamic coalition formationS there are no rules that ensure orderly transitions of powerand no checks against some members of the ruling coalition eliminating or sidelining others.However, formal models of dynamic coalition formation in nondemocratic societies have notbeen developed until recently.In this paper, we draw on our work on dynamic coalition formation (Daron Acemoglu,Georgy Egorov and Konstantin Sonin, 2008a) and investigate Tullock™s conjecture formally.1