The supply of Democracy

Different from a popular view, most modern democracies are not the result of popular uprisings that swept away autocratic systems and substituted them by modern democratic government structures. Rather, they are more likely to be the result of some long-term developments in which initially autocratic government conceded stepwise moves into ever more decentralized structures of public authorities and institutions, hence leading to ever deeper levels of formal institutional differentiation. Following our hypothesis, a rent-maximizing government concedes steps into formal institutional differentiation whenever the latter can be viewed as an input into the macroeconomic production function and whenever the returns from institutional differentiation are sufficiently high. Particularly, with sufficiently high levels of these returns, a dynamic tends to drive a country into ever higher levels of formal institutional differentiation, until they eventually reach the level of full-fledged democracies; by contrast, too low levels of these returns tend to initiate a downward spiral in the degree of formal institutional differentiation that may eventually end up back in autocracy. An empirically quite relevant implication is that intermediate levels of formal institutional differentiation ten to be unstable. Finally, we point to a credibility problem that arises when governments solve some post-constitutional credibility problems of their political action by way of conceding formal institutional differentiation. The problem arises since these concessions mainly shift the post-constitutional credibility problems to the constitutional level, where they will, under specific conditions, become relevant again. The latter is the case whenever a government has an incentive to infringe upon the formal independence of formally decentralized government bodies. In such a case some crypto-authoritarian governments will evolve, which is another empirically quite relevant implication of our approach.