Promotion contracts and bureaucratic rents: economic foundations of a one-party regime

This paper analyzes the economic foundations of a one-party political regime, where the ruling bureaucracy captures rents through collective control over state property and job assignment. Stability of such a regime and the potential for endogenous institutional change are key issues in the transition to market economy and democracy in former socialist and many developing countries. Our model of one-party regime is based on the notion of an implicit contract between the incumbent bureaucracy and “activists” seeking promotion into rent-paying positions, whereby the latter exchange their supervisory services for deferred promotion. This contract allows the bureaucracy to increase its rents at a cost of retirement. Demand for activists’ services is correlated with public investment and declines with the accumulation of capital in the public sector. Time inconsistency is inherent in this contract. The ensuing drift away from the long-run optimal contract reduces the supply of activists. Eventually, the cost of borrowing activist services by the ruling bureaucracy exceeds the rents it produces, and the bosses abandon collective proprietorship and single-party organization that serve to facilitate this exchange. We test our model using political and economic data from a panel of former Soviet republics and find significant support in its favor. Long-run trends of communist party recruitment in the USSR and the end of the Soviet regime in 1991 are consistent with our model. The latter resulted from the breach of promotion contract by the party bureaucracy and declining returns to public investment. JEL classification: D23, D73, H11, J45, P26