A Dynamic Model of the Demand for the Rule of Law

This paper develops a dynamic model that addresses a central political economy question in much of the former Soviet Union (and arguably in many developing countries as well): Will those who obtained assets at large discounts, or stole them, in the beginning of the transition become the vanguard of the rule of law, or will they be indifferent to or even actively frustrate the establishment of the rule of law? The model suggests that the view that once stripping has occurred, the strippers will say “enough” and by supporting the rule of law seek public protection of their gains, is flawed. By abstracting from the obvious problem that strippers who obtain great wealth can buy special favored treatment from the state, the model highlights two less obvious factors that can weaken support for the rule of law: First, that the asset-strippers can remove the assets from exposure to further stealing, and in that case they will not care about public protection of their gains. And second, that stripping can give agents an interest in prolonging the no-rule-of law state, since full state protection of asset-strippers may be infeasible even under an ostensible rule of law. Knowing this, strippers will be less supportive of the rule of law. * Hoff: World Bank, Washington DC 20433 (e-mail: [email protected]); Stiglitz: Columbia University, New York, NY 10027 (e-mail: [email protected]). We thank Avinash Dixit, Jeffry Frieden, Phil Keefer, Jean-Philippe Platteau, Anqing Shi, Ken Sokoloff, and seminar participants at Harvard, Pennsylvania State University, Princeton, UCLA, the World Bank, the 2000 and 2001 NEUDC, the 2002 meetings of the American Political Science Association, and the MacArthur Foundation Network on the Effects of Inequality on Economic Performance, for very helpful comments and suggestions. The findings and interpretations expressed in this paper are those of the authors and do not necessarily represent the views of the World Bank.