The Good, the Bad, and the Civil Society
Jiahua Che∗
Kim-Sau Chung†
Xue Qiao‡
April 5, 2012
∗
Department of Economics, Chinese University of Hong Kong, Hong Kong; [email protected]
Department of Economics, University of Minnesota, U.S.A.; [email protected]
‡
Department of Economics, Tsinghua University, China; [email protected]
†
The Good, the Bad, and the Civil Society
Abstract
There are three signature features of autocracies. First, there is wide variety
across autocracies in terms of economic performance: some do much better and
some much worse than democracies. Second, economic performance within a given
autocracy is more sensitive to leader quality, resulting in higher volatility. Third,
all autocracies, good or bad, tend to have weaker civil societies than democracies
do. We attribute these features to the core of the autocratic political institution:
incumbent leader selects future leader as opposed to citizens at large selecting future
leader under democracy. We deliver our analysis in an overlapping-generation model
where two kinds of dynamic free-riding problem arise. The first arises among different
generations of citizens in implementing far-sighted policies. Political leaders come in
two types, good ones aim to correct this first kind of dynamic free-riding problem,
while bad ones do not care and aim to steal public assets. Both types need a weak civil
society to achieve their goals, but a second dynamic free-riding problem arise among
different leaders when it comes to suppressing the civil society. The autocratic leaderselection mechanism helps resolve this second dynamic free-riding problem, results in
a continuously weakened civil society, which in turn generates more variation both
among autocracies and within a given autocracy. A rich set of comparative statics
is offered.
Keywords: autocracy, democracy, political selection, civil society
JEL code: D72, H11, P48
1
Introduction
Almost half of the world is still governed under autocratic regimes, among which some
have begun to embrace democracy, while some have been attaining remarkable economic
achievement. Unfortunately, the literature studying autocracies remains disproportionally
small compared with that studying democracies. Out of this emerging literature comes a
number of salient empirical patterns.
First, there is no systematic and robust evidence, either in cross-country comparisons
or in within-country studies, that democracy brings about better economic performance
than autocracy does (Przeworski and Limongi (1993), Barro (1996), Mulligan, Gil, and
Sala-i-Martin (2004), Glaeser, La Porta, Lopez-d-Salines, and Shleifer (2004), Giavazzi
and Tabellini (2005), Aghion, Alesina, and Trebbi (2007), Besley and Kudamatsu (2008)).
Some autocracies do much better and some much worse than democracies. Second, however,
economic performances of autocracies tend to be more volatile than those of democracies
(Rodrik (2000), Quinn and Wolley (2001), Mobarak (2005)). Part of this extra volatility
comes from the fact that political leaders exert a more powerful impact on economic performance in autocratic regimes than in democracies (Glaeser, La Porta, Lopez-d-Salines, and
Shleifer (2004), Jones and Olken (2005)). Third, what could serve as restraints over political leaders, such as freedom of speech and civic activism, are more likely to be suppressed
in autocracies than in democracies (Mulligan, Gil, and Sala-i-Martin (2004)).
While some previous models take these features as fundamentals, and derive implications of them,1 we seek to explain them as endogenous phenomena, and hopefully with a
unified theory.
We attribute these empirical patterns to the core of the autocratic political institution:
incumbent leader selects future leader as opposed to citizens at large selecting future leader
under democracy. We deliver our analysis in an overlapping-generation model where two
kinds of dynamic free-riding problem arise. The first arises among different generations
1
For example, McGuire and Olson (1996) assume implicitly that democratic leaders are completely
restrained (and hence incapable of wrong-doing in high office), and derive implications of that assumption.
See Olson (1993) for a similar analysis. Similarly, Larsson and Parente (2008) assume exogenously that
autocracies’ economic performances are more uncertain, and derives their analysis based on this assumption.
1
of citizens in implementing far-sighted policies. Political leaders come in two types, good
ones aim to correct this first kind of dynamic free-riding problem, while bad ones do not
care and only aim to steal public assets. Both types need a weak civil society to achieve
their goals, but a second dynamic free-riding problem arise among different leaders when
it comes to suppressing the civil society. The autocratic leader-selection mechanism helps
resolve this second dynamic free-riding problem, results in a continuously weakened civil
society.
A continuously weakened civil society then leads to two kinds of variability in economic
performance. First, within a given autocracy, a weakened civil society allows the leader’s
quality to have a larger impact. To the extent that leader’s quality fluctuates, the country’s
economic performance fluctuates with it.
Second, a weak civil society makes the choice of future leader more relevant, and hence
this choice becomes more sensitive to primitive parameters of a given country. To the extent
that these parameters vary across countries, the (endogenous) leader-selection outcome
varies across countries as well.
In our model, the cross-country variability is captured by the fact that, while there is
only one kind of equilibrium in democracy, there are several possible kinds in autocracy,
depending on the primitive parameters of a given country. The within-country variability
is captured by the fact that most of the possible equilibria in autocracy are accompanied by
a stationary distribution (of economic performance) that exhibits more volatility. Either
of these two kinds of variability could have explained Besley and Kudamatsu’s (2008)
empirical finding that the distribution of economic performances among autocracies tends
to be more diffused than that among democracies and has a longer tail on both sides.
However, it is still important to conceptually distinguish the two, because the existence
of within-country variability suggests that Besley and Kudamatsu’s (2008) result will not
completely go away even if we control for all country-specific characteristics.
Although we build our theory on autocracy’s leader-selection mechanism, and argue
that this mechanism alone can already account for many important differences between
autocracies and democracies, this does not imply that we dismiss the importance of other
2
mechanisms.
One particular mechanism that has been emphasized by previous studies is the reelection
mechanism: autocratic and democratic leaders face different incentives to implement good
policies because they face different reelection mechanisms. Implications of this difference
have been studied by, for example, Robinson (2001), Bueno de Mesquita et. al. (2003),
Maskin and Tirole (2004), Shen (2007), Miquel (2007), and Besley and Kudamatsu (2008).2
According to Besely (2005), this mechanism “has been studied at length”, while the leaderselection mechanism “has received far less attention” despite the fact that the “past 200
years of political history justify an emphasis on selection”.
Indeed, we made a deliberate effort to make sure that our analysis is driven purely by
the leader-selection mechanism. In particular, we assume that each leader can serve at most
one term (in both democracy and autocracy), and hence makes policy choices without the
reelection consideration.
There are also studies that, like ours, emphasize the importance of the leader-selection
mechanism. Notable examples include Acemoglu, Egorov, and Sonin (2010), who study
political selection of a broad range of political institutions that include democracy and
autocracy as two extremes. Their model, however, does not generate enough variation
either among or within autocracies to match the data. In particular, autocracies universally
sink to the bottom, and are dominated by democracies. This is due to two assumptions
made in their model: (1) there is no conflict of interests among voters (who in turn always
elect the best possible leader under democracy), and (2) there is no term limit in political
office (so that, under autocracy, eventually a bad incumbent will remain in power forever
after eliminating other, better candidates). Our model eschew these two assumptions, and
manage to generate more variation both across autocracies and within a given autocracy.
A less related study is Caselli and Morelli (2004), who examine the determination of
leadership quality. Their focus is on the decision of individuals with different qualities in
joining the government, rather than on how different leader-selection mechanisms affect
economic performances.
2
While these studies do not always explicitly refer to autocracies, their analyses are sufficiently general
for readers to make such connection.
3
Our study also extends a number of existing studies in the political economy literature.
Our first dynamic free-riding problem (the one arising among different generations of citizens) echoes the inefficiency in the representative democracy analyzed by Besley and Coate
(1998). Our overlapping-generation model of leadership succession bears resemblance to
Rauch (2001), although Rauch’s (2001) interest is not on autocracies, but rather on the
question of whether a bureaucratic structure can help the incumbent leader select a good
successor.3
The rest of this paper is organized as follows. The next section introduces the model.
Section 3 analyzes first the equilibrium outcome under democracy, followed by a characterization of various equilibrium outcomes brought by autocracy. Section 4 discusses the
intuition of, and draws implications from, the analytical results obtained in the previous
section. Section 5 concludes.
2
The Model
Consider an overlapping-generation economy. At the beginning of each period t, a
unit mass of young citizens are born. Each citizen lives for at most two periods. With
probability > 0, a typical citizen dies prematurely after one period. Therefore, in each
period t, the economy is populated by a unit mass of young and a 1 − mass of old citizens.
The role of is to break the symmetry between the sizes of the young and old populations,
making the young citizens the majority. Throughout this paper, we shall hence simplify
algebra by treating as arbitrarily small while remaining non-zero.
All payoffs will be measured in terms of a (perishable) numeraire good. At the beginning
of each period, each old citizen is endowed with e units of this numeraire good, which can
be thought of as income from his inelastic labor supplied when he was young.
There is a government, run by a politician. We shall explain later how a politician
is selected into this office under different political regimes. The government does two
things, which we shall refer to as its welfare and investment policies. First, it implements
3
Rauch (2001) assumes exogenously that an incumbent wants to select a good successor. In our model,
an incumbent’s preference over successors is endogenous.
4
transfer payments among citizens. We assume that different young citizens have to be
treated equally, and similarly for different old citizens. Therefore transfer payments can
take only the form of taxing old citizens (uniformly) and transferring to young citizens
(also uniformly). Transfer payments involve deadweight loss. The exact form of such loss
matters little. Here, we assume that if τ units of numeraire good are taxed from the old
citizens, a fraction δ ∈ (0, 1) of τ will dissipate in the process of transfer. Let λ = δe denote
the total deadweight loss if each old citizen’s full endowment e is taxed away.
The government is also endowed with a certain amount of perishable goods at the
beginning of each period, which can be thought of as income from natural resources. The
second thing the government does is to invest this endowment. There are three mutually
exclusive ways to invest it. First, the government can invest it in some long-term project,
which is so long-term that none of the citizens, young or old, will live long enough to enjoy
the benefit. More concretely, we assume that a long-term investment made in period t
yields a public good in period t + 2, which in turn generates for each period-(t + 2) citizen
a benefit equivalent to R units of the numeraire good.
Alternatively, the government can invest this endowment in some short-term project,
which yield benefits immediately. Specifically, a short-term investment made in period t
yields a public good in the same period, which in turn generates for each period-t citizen a
benefit equivalent to G units of the numeraire good. We assume G < β 2 R, where β is the
discount factor.
The third way to spend this endowment is on perks given to the politician in office. The
perks generate for that politician a private benefit equivalent to Z units of the numeraire
good, with Z > G.
We refer to the politician in office in period t as the period-t leader. However he was
selected, the period-t leader’s choice of the government’s period-t welfare and investment
policies is subject to the constraint of public opinion, which we refer to as civil society. We
use ωt to denote the strength of the civil society in period t, with ωt = 1 meaning strong
and ωt = 0 weak. The period-t leader gets to choose the welfare and investment policies at
his will only if ωt = 0; if ωt = 1, the government must give in to popular demand and as
5
a result, period-t policies will in effect be dictated by the majority of the society (i.e., the
period-t young citizens).
The civil society is fragile: the strength of civil society is itself manipulatable by the
government. However, to ensure that the constraint of public opinion does have a bite on
the policy choice, we also treat civil society, like other institutions, as resilient. Thus, the
period-t leader can determine only the strength of the civil society in the next period, ωt+1 .
For simplicity, we assume that the government’s ability to manipulate civil society is not
constrained by the strength of civil society; hence the period-t leader can set ωt+1 costlessly.
In modeling this fragile and yet resilient civil society, we have in mind that, in an initially
open and free society, tactics a government deploys to discourage civil activism will not be
able to suppress populist demand immediately, but over time, the accumulated memory of
government oppression will suffice to silence people, and that the frustrated civil society
will rebound only long after the government has stopped applying these tactics. Note also
that we speak of a “strong” or “weak” civil society only in relative terms. In particular, a
“strong” civil society is not strong enough to change the political regime from autocracy
to democracy, or vice versa; nor a “weak” civil society weak enough to allow the leader to
make such changes. Similarly, a “strong” civil society is not strong enough to protect itself
from being weakened by the leader, and a “weak” civil society is not too weak to rebound.
We consider two political regimes: democracy and autocracy, which we regard as differing only in their constitutional rules of how a politician is selected into office—every
other difference comes from there. In autocracy, the leader is selected by the period t − 1
leader; in democracy, the leader is elected by the citizens by a majority rule. We assume
that, in democracy, the majority group (i.e., the period-t young citizens) act as a single
selector. As such, we ignore any collective-decision problem among them. We also assume
the constitutional rules to be exogenously imposed from the onset. As such, we ignore
more general regimes such as those that allow switching back and forth between these two
by way of, say, referendums.
The selection of the period-t leader takes place at the beginning of period t. Regardless
of the political regime, we assume that only young citizens are eligible to be selected into
6
office, perhaps because old citizens are not physically fit for the job. This assumption,
together with the assumption of young citizens being the majority group, ensures that the
selector in either political regime, i.e the young under democracy and the incumbent under
autocracy, will calculate how their leadership choice will affect policies, and hence their
very own payoffs, in the future.
There are two types of citizens in each generation: the set of benevolent ones is nonempty but has measure 0, while the rest are selfish. A selfish young citizen’s utility is
Ut = uyt + βuot+1 ,
with uyt = (1 − δ)τt + gt + rt
and uot+1 = e − τt+1 + gt+1 + rt+1 ,
where τt is the tax imposed on the period-t old citizens, gt = G if the government makes
short-term investment in period t (gt = 0 otherwise), rt = R if the government makes
long-term investment in period t − 2 (rt = 0 otherwise), and β is the discount factor. Total
welfare in period t is (recall that almost all citizens are selfish, and that the premature
death rate is arbitrarily small)
wt = uyt + uot .
A period-t benevolent citizen (young or old) maximizes
Wt =
∞
X
β s wt+s .
s=0
Types are private information. At the beginning of each period t, before the selection
process takes place, a heroic event may happen, in which a benevolent young citizen will
rise to the occasion and reveal credibly his type to the society. Such a heroic event happens
with probability q > 0. If and only if it happens, the selector has the option of selecting
this identified benevolent candidate. Given the fact that the set of benevolent citizens has
a measure of zero, a random candidate is almost surely selfish.
It is not an invention of this model to recognize the possible presence of benevolent po7
litical leaders. When studying how re-election concern offers accountability for government
behaviors, Tirole and Maskin (2004) as well as Besley and Kudamatsu (2007) for example,
rely crucially on the possibility of leaders being benevolent. Different from these studies,
however, we do not assume an exogenous probability of a leader being benevolent, rather
in this model the probability is made endogenous as a result of political selection.
Note that having benevolent leaders does not immediately imply supremacy of autocracy. It remains to be shown what types of leaders will be placed into power under either
political regime. Nevertheless, to make our analysis more intriguing, we stack our cards
against autocracy by assuming that, when the selector is a single person instead of the
majority group, the selector can appoint a successor in exchange for a bribe. In other
words, bribe-taking can take place under autocracy only. While this appears to be an
additional difference between autocracy and democracy, such a difference can in fact be
derived endogenously from the fact that the right to elect a leader rests with one single
person in autocracy but is shared by all in democracy.
We assume benevolent selectors/candidates do not take/pay bribe. Bribe-taking hence
can take place only when the incumbent leader is selfish, and when he intends to select one
out of infinitely many selfish young citizens as his successor. We do not try to explicitly
model how any bribery contract may be enforced, or how a young citizen may borrow
resources to pay bribe upfront. Instead, we collapse all these and other possible obstacles
into a single parameter b̂ ∈ (0, 1), which we interpret as the maximum portion of perks
a candidate can credibly pledge to share with the selector. Two implications follow immediately from this specification: the maximum bribe a period-t leader can collect from
selling the office is b := b̂Z if he has weakened the period-t + 1 civil society, which in turn
allows his successor to collect perks in the following period, and is 0 if he has not. Finally,
we assume that the strength of the period-t civil society by itself does not constrain the
period-t leader’s ability to sell office.
We summarize the time line (within period t) as below:
1. a heroic event may or may not happens;
2. the selector (the majority group if we are in a democracy; or the period-(t − 1) leader
8
if we are in an autocracy) selects the period-t leader; bribery may or may not take
place;
3. if ωt = 1, the majority group choose the government’s welfare and investment policies;
4. if ωt = 0, the period-t leader chooses the government’s welfare and investment policies;
5. the period-t leader chooses ωt+1 ;
6. period-t payoffs realized.
Before proceeding to the analysis, we observe for later reference that wt ≥ e − λ =: w,
and Wt ≥ w/(1 − β) =: W . The lower bound is achieved if the government always spends
the public funds on the leader’s perks and implements the maximum welfare transfer.
Similarly, wt ≤ e + R =: w, and Wt ≤ w/(1 − β) =: W . The upper bound is achieved if
the government always spends the public funds on long-term investment and implements
no welfare transfer.
3
Equilibria
Our solution concept is pure-strategy Markov-perfect equilibrium. The only payoff-
relevant state variable is the strength of the civil society ωt .
Before we study the equilibria in democracy and in autocracy, respectively, let’s observe
some common features across these equilibria. First, when ωt = 1, the majority group (i.e.,
the period-t young citizens) will dictate the government’s welfare and investment policies.
Regardless of the political system, in any Markov-perfect equilibrium, they must choose to
tax the old citizens maximally (i.e., τt = e, resulting in the maximum deadweight loss of
λ), and to make short-term investment (generating payoff G immediately for every citizen).
We shall refer to these as the populist policies.
Second, when ωt = 0, and when the period-t leader is a benevolent one (hereafter a
B-leader), he must choose not to tax the old citizens (avoiding deadweight loss), and to
make long-term investment (generating payoff R for every period-(t + 2) citizens).
9
Third, when ωt = 0, and when the period-t leader is a selfish one (hereafter an S-leader),
he must choose to tax the old citizens maximally (because he is himself a young citizen),
and to invest in his own perks (generating immediate payoff of Z for himself).
Therefore, equilibria in democracy and in autocracy differ in only two aspects: (i) how
a period-t leader chooses ωt+1 , and (ii) the kind of leader selected into office. We now turn
to these questions.
3.1
Democracy
Given the above observations, in democracy, an equilibrium boils down to a vector
ΩB (·), ΩS (·), LY (·) , where ΩB (ωt ) (resp. ΩS (ωt )) is a (period-t) B-leader’s (resp. Sleader’s) equilibrium choice of ωt+1 when the state is ωt , and LY (ωt ) ∈ {S, B} is the
(period-t) young citizens’ equilibrium choice of (period-t) leader when the state is ωt . Note
that, if LY (ωt ) = S, the young citizens intend to select a selfish candidate into office, and
they will succeed with probability one (recall that they can always randomly pick one of
the young citizens); however, if LY (ωt ) = B, the young citizens intend to select a benevolent candidate into office, but they will succeed only with probability q. With probability
1 − q, a heroic event does not happen, and they will have no means to identify a benevolent
candidate. Markov-perfection requires that these choices depend only on the state but not
on the history. Indeed, that the young citizens’ leader choice does not depend the history
implies that ΩB and ΩS should be independent of the state; i.e., ΩB (0) = ΩB (1) = ΩB and
ΩS (0) = ΩS (1) = ΩS .
One immediately observes that, in any equilibrium, LY (0) = S. Indeed, when it comes
to choosing the next period’s state ωt+1 , an S-leader, being one of the young citizens, has
the same preference as other young citizens have. And when it comes to choosing the
current period’s welfare and investment policies, an S-leader’s choices (maximum welfare
transfer, no short-term investment) are closer to the young citizens’ ideals than a B-leader’s
(no welfare transfer, no short-term investment) are.
With LY (0) = S, we must have ΩB = ΩS = 1, as shown by the following two lemmas.
Lemma 1 LY (0) = S implies ΩS = 1.
10
Proof. An S-leader’s choice of ωt+1 affects only uot+1 . If he chooses ωt+1 = 0, then uot+1 = 0
because the period-(t+1) leader will be an S-leader, who will implements maximum welfare
transfer and spend public funds on perks. If he chooses ωt+1 = 1, then uot+1 = G because
populist welfare and investment policies will then prevail.
Lemma 2 LY (0) = S implies ΩB = 1.
Proof. Suppose LY (0) = S but ΩB = 0. Let W (ωt ) be the equilibrium discounted sum
of future welfare starting from the initial state ωt . A B-leader’s choice of ωt+1 affects
only Wt+1 . If he chooses ωt+1 = 0, then Wt+1 = W (0) = e − λ + βW (ΩS ) = w + βW (ΩS )
because the period-(t+1) leader will be an S-leader, who will implements maximum welfare
transfer and spend public funds on perks. By Lemma 1, W (ΩS ) = W (1). Therefore,
W (0) = w + βW (1). If he chooses ωt+1 = 1, then Wt+1 = W (1). Since ΩB = 0, we have
W (0) = w + βW (1) ≥ W (1),
(1)
which implies W (1) ≤ W . But this is impossible, because W (1) = e−λ+G+β qW (ΩLY (1) )+
(1 − q)W (ΩS ) > w + βW = W , a contradiction.
But if both kinds of leaders have the same choice of next period’s state ωt+1 , then
young citizens will be indifferent between them when ωt = 1, because populist policies will
prevail anyway. This completes the characterization of all pure-strategy Markov-perfect
equilibrium under democracy, and we have the following proposition.
Proposition 1 In democracy, the unique4 pure-strategy Markov-perfect equilibrium is that
neither kind of leader weakens the civil society when it is strong, and both allow it to
rebound when it is weak; young citizens are indifferent between the two kinds of leader
when the civil society is strong, and will select an S-leader when it is weak. Regardless of
4
There are actually two equilibria, differing from each other in LY (1), but they are observationally
indistinguishable.
11
the initial state ω1 , the country enters the absorbing state of ωt = 1 starting from period 2.
And, subsequently, populist welfare and investment policies prevail in every period.
3.2
Autocracy
Given the observations made at the beginning of this section, in autocracy, an equilib
rium boils down to a vector ΣB (·), ΣS (·) , where ΣB (ωt ) = ΩB (ωt ), LB (ωt ) ∈ {0, 1} ×
{B, S} is the (period-t) B-leader’s equilibrium choice of ωt+1 and (period-(t + 1)) successor
when the state is ωt ; and similarly for ΣS (ωt ). As in the case of democracy, Markovperfection implies that ΣB and ΣS should be independent of the state; i.e., ΣB (0) =
ΣB (1) = ΣB = (ΩB , LB ) and ΣS (0) = ΣS (1) = ΣS = (ΩS , LS ).
Notice that, independent of B-leaders’ strategies, an S-leader is always indifferent between ΣS = (1, B) and ΣS = (1, S). His payoff when he becomes old will be G in both cases.
How S-leaders break ties, however, will have implications on the long-run performance of
autocracy. In this paper, we assume that they always break ties by favoring (1, B) over
(1, S). This can be justified by a weak-dominance argument: if there is any risk that the
period-(t + 1) civil society is weaker than expected, then a B-successor will deliver a higher
uot+1 than an S-successor will.
We also observe for later reference that, in any equilibrium, LB = B. This is because
the preferences of a B-leader and a B-successor are congruent.
The dynamics in autocracy is much richer than that in democracy. Depending on
parameters, different equilibria may arise. However, as we shall see, pure-strategy Markovperfect equilibrium always exists, and for generic parameter values it is also unique.
We find it helpful to visualize the absorbing dynamics of any given equilibrium with a
picture like Figure 1. In such a picture, the two columns represent the state of civil society,
while the two rows the type of incumbent leadership, thus generating four cells, each corresponding to a generalized state that the economy potentially visit in a given period in an
absorbing dynamics. For example, the cell in row B and column ω = 1 corresponds to the
generalized state where, in a given period t, the civil society is strong, and a B-leader is
in office. Entries in these cells, on the other hand, represent the incumbent leader’s choice
12
of ωt+1 and (period-(t + 1)) successor, should the economy actually visit these generalized
states in the absorbing dynamics of a particular equilibrium. Whether a particular generalized state will be reached in an absorbing dynamics, as we will show later, depends
on what kind of an equilibrium prevails under certain parameter range. For example, in
Figure 1, entries in row B indicate ΣB = (1, B) and entries in row S indicate ΣS = (0, B);
these together describe an equilibrium, in which the economy reaches all the fours cells in
its corresponding absorbing dynamics. In addition, we use arrows in a picture like Figure
1 to illustrate how the economy commutes from one cell to another. An arrow coming out
of a cell tells us the generalized states the economy begins in period t and reaches in period
t + 1. The dotted arrow corresponds to the evolution conditional on a heroic event, which
happens with probability q; the solid arrow the evolution conditional on the complementary
event.
ω =1
ω =0
B
(1,B)
(1,B)
S
(0,B)
(0,B)
Figure 1: the “mostly-bad” dynamics
It is easy to show that there can only be five different absorbing dynamics (see the
Appendix). Besides the one shown in Figure 1, the other four are shown in Figure 2. Of
particular interest are Figures 2a, 2b, and 2c, where the economy reaches only some of the
four generalized cells in the described absorbing dynamics.
3.2.1
The “Democratic” Dynamics
We call the absorbing dynamics in Figure 2a the “democratic” dynamics. Its corresponding welfare performance is the same as that under democracy. In every period,
regardless of the type of the leader in office, he refrains from weakening the civil society,
13
ω =1
ω =0
ω =1
ω =0
B
(1,B)
B
(0,B)
S
(1,B)
S
(0,B)
(a) the “democratic” dynamics
ω =1
(b) the “good dynamics
B
(0,S)
S
ω =1
ω =0
B
(0,B)
(0,B)
S
(1,B)
(1,B)
ω =0
(c) the “bad” dynamics
(d) the “mostly-democratic” dynamics
Figure 2: the other four possible absorbing dynamics
and tries to select a B-successor whenever possible. Since civil society is always strong,
populist welfare and investment policies always prevail. This economy, albeit being an
autocratic one, is observationally indistinguishable from a democratic one.
When will ΣB = ΣS = (1, B) arise as an equilibrium? For a B leader not to deviate
to ΣB = (0, B), anticipating that any future leader will continue to play the equilibrium
strategy, it must be that weakening the civil society for one period generates no greater
expected welfare than the populist policies do:
e − λ + G ≥ q(e + β 2 R) + (1 − q)(e − λ)
⇐⇒
G ≥ q(λ + β 2 R) =: Q.
For an S-leader not to deviate to ΣS = (0, S), it must be that the bribe he can collect
from selling the office is no greater than the loss of short-term public good:
G ≥ b.
For an S-leader not to deviate to ΣS = (0, B), it must be that the benefit of having a B14
successor implementing no welfare transfer does not compensate for the loss of short-term
public good:
G ≥ qe + (1 − q)b.
Proposition 2 The “democratic” dynamics is generated by the equilibrium ΣB = ΣS =
(1, B), which arises when G ≥ Q and G ≥ max{e, b}. The economy is observationally
indistinguishable from a democratic one, with welfare wdem = e − λ + G in each period.
3.2.2
The “Bad” Dynamics
We call the absorbing dynamics in Figure 2c the “bad” dynamics. In every period,
the leader selected into office is an S-leader, who implements maximum welfare transfer,
spends public funds on perks, weakens next-period’s civil society, and sells the office to an
S-successor. In every period, welfare is the lowest possible in this model: wbad = w = e − λ.
When will ΣS = (0, S) arise in equilibrium? For an S-Leader not to deviate to ΣS =
(0, B), it must be that, by allowing the civil society to rebound and populist policies to
prevail in the next period, his gain in short-term public good cannot compensate for his
loss in bribery income:
b ≥ G.
Similarly, for him not to deviate to ΣS = (0, B), it must be that the benefit of having
a B-successor implementing no welfare transfer cannot compensate for the loss in bribery
income:
b ≥ qe + (1 − q)b
⇐⇒
b ≥ e.
As long as b ≥ max{G, e}, and hence ΣS = (0, S), whether ΣB = (1, B) or ΣB = (0, B)
does not affect the absorbing dynamics. In the appendix we show that either one will arise
in equilibrium, depending on whether G ≥ Q or Q ≥ G, respectively.
Proposition 3 When b ≥ max{G, e}, either ΣB = (1, B), ΣS = (0, S) or ΣB =
(0, B), ΣS = (0, S) will arise as an equilibrium, depending on whether G ≥ Q or Q ≥ G,
respectively. Both equilibria generate the “bad” dynamics, with welfare wbad < wdem generated in each period.
15
3.2.3
The “Good” Dynamics
When most people think about autocracy, the “bad” dynamics is likely what appears
in their mind. But it is not the only possible absorbing dynamics. Under certain parameter ranges, not only that autocracy can be as good as democracy (see the “democratic”
dynamics above), it can even outperform democracy. The possibility of the latter case is
demonstrated in Figure 2b, which we call the “good” dynamics. In every period, regardless of the type of the leader in office, he weakens the civil society and tries to select a
B-successor whenever possible. Civil society is persistently weak, and the type of leader
in office is an i.i.d. draw every period. With probability q he will be a B-leader, implementing no welfare transfer and making long-term investment. With probability 1 − q he
will be an S-leader, implementing maximum welfare transfer and spending public funds on
perks. Single-period welfare, wt , swings wildly between the highest possible, w, and the
lowest possible, w, levels. Occasionally, wt takes the intermediate levels of e − λ + R (if the
period-t leader is an S-type, but the economy enjoys the benefit of a long-term investment
made by a B-leader two periods ago) and e (if the period-t leader is a B-type, but the
period-t − 2 leader is an S-type). In the limiting distribution,5 the expected single-period
welfare is wgood = e + qR − (1 − q)λ.
At first glance it is not obvious that wgood > wdem . But we shall see that ΣB = ΣS =
(0, B) arises as an equilibrium only if wgood > wdem . For a B-leader not to deviate to
ΣB = (1, B), anticipating that future leaders will follow the equilibrium strategies, it must
be that allowing the civil society to rebound for one period generates no greater expected
welfare:
q(e + β 2 R) + (1 − q)(e − λ) ≥ e − λ + G
⇐⇒
q(λ + β 2 R) = Q ≥ G.
5
In the expression of expected single-period welfare, where the expectation is taken with respect to the
limiting distribution, the benefit of a long-term investment, R, is not discounted by β 2 . The intuition is
that a long-term public good appears q of the time on average.
16
The last inequality implies q(λ + R) > G, which in turn guarantees that
wgood = e + qR − (1 − q)λ = e − λ + q(λ + R) > e − λ + G = wdem .
Similarly, for an S-leader not to deviate to ΣS = (1, B) or ΣS = (0, S), it must be that
neither the benefit of short-term public good nor the bribery income from selling the office
suffices to compensate for his loss from maximum welfare transfer:
e ≥ max{G, b}.
Proposition 4 The “good” dynamics is generated by the equilibrium ΣB = ΣS = (0, B),
which arises when Q ≥ G and e ≥ max{G, b}. The performance of the economy fluctuates
period by period, but on average is strictly better than that in democracy: wgood > wdem
3.2.4
The “Mostly-Democratic” Dynamics
We call the absorbing dynamics in Figure 2d the “mostly-democratic” dynamics because, under the reasonable assumption that q < 1/2, the economy spends most (more
precisely, 1 − q > 1/2) of the time in the state of strong civil society, where populist policies prevail and the economy resembles one in democracy. In every period, regardless of
the type of the leader, he tries to select a B-successor whenever possible. The type of
leader in office is hence an i.i.d. draw every period. A B-leader always weakens the civil
society, while an S-leader allows it to rebound. In the limiting distribution, the expected
single-period welfare is
wmd = (1 − q)(e − λ + G) + q 2 (e + R) + q(1 − q)(e − λ).
Similar to the case of the “good” dynamics, although at first glance it is difficult to
compare wmd with wdem , one can verify that ΣB ) = (0, B), ΣS = (1, B) arises as an
equilibrium only if wmd > wdem (the proof is in the Appendix).
Proposition 5 The “mostly-democratic” dynamics is generated by the equilibrium ΣB ) =
17
(0, B), ΣS = (1, B) , which arises when Q ≥ G and G ≥ max{e, b}. The performance of the
economy fluctuates period by period, but on average is strictly better than that in democracy
(i.e., wmd > wdem ), although also strictly worse than that in the “good” dynamics (i.e.,
wmd < wgood ).
3.2.5
The “Mostly-Bad” Dynamics
We call the absorbing dynamics in Figure 1 the “mostly-bad” dynamics because, for q
small enough, the economy spends most (more precisely, (1 − q)2 ) of the time in the worst
situation of having an S-leader who, being unconstrained by the civil society, implements
maximum welfare transfer and spends public funds on perks. In every period, regardless
of the type of the leader, he tries to select a B-successor whenever possible. The type of
leader in office is hence an i.i.d. draw every period. An S-leader always weakens the civil
society, while a B-leader allows it to rebound. In the limiting distribution, the expected
single-period welfare is
wmb = q(e − λ + G) + q(1 − q)(e + R) + (1 − q)2 (e − λ).
Unlike in the cases of the “good” and the “mostly-democratic” dynamics, the comparison between wmb with wdem is ambiguous (the proof is in the Appendix).
Proposition 6 The “mostly-bad” dynamics is generated by the equilibrium ΣB ) = (1, B), ΣS =
(0, B) , which arises when G ≥ Q and b ≥ max{e, G}. The performance of the economy
fluctuates period by period, and on average is strictly worse than that in democracy (i.e.,
wmb < wdem ) if G > q(λ + R), although also strictly better than that in the “bad” dynamics
(i.e., wmb > wbad ).
The parameter ranges covered by Propositions 2–6 form a partition of the whole parameter space under study. As a result, a pure-strategy Markov-perfect equilibrium always
exists for any combination of parameters, and for generic combinations it is also unique.
18
4
Analysis
We can summarize what we have learned from this simple model into seven lessons.
1. Democracies are alike, but autocracies come in different colors.
Different economies have different local conditions. In terms of our model, they come
with different primitive parameters: q, e, Z, R, G, b̂, δ, etc. However, these differences
notwithstanding, these economies behave similarly under democracy: populist policies prevail, which favor the majority population at the expenses of the minorities, and favor
the current generation at the expense of future ones. Aside from that, the government
is relatively clean, and the civil society relatively strong, and economic performance relatively stable. Different democracies with different parameters will have different economic
performances, but small differences in those parameters lead to small differences in those
performances.
Small differences in primitive parameters will, however, drive big differences in economic
performances among autocracies. This is because two autocracies with small differences in
those parameters can find themselves in two very different kinds of equilibrium. This often
amplifies the direct effect of a parameter change. For example, an increase in R increases
the return of long-term investments, but also increases the likelihood of that an autocracy
gets absorbed into the “good” or the “mostly-democratic” dynamics (Propositions 4 and 5),
and hence indirectly increases the likelihood that these long-term investments will be made
as well. Similarly, a decrease in e and G not only decreases the average pre-tax income
and return of short-term investments, but also increases the likelihood that an autocracy
gets absorbed into the “bad” or the “mostly-bad” dynamics (Propositions 3 and 6), and
hence further decreases the autocracy’s overall economic performance. Because of these
amplification effects, the distribution of economic performances among autocracies tends
to be more diffused than that among democracies and has a longer tail on both sides, as
documented by Besley and Kudamatsu (2008).
Autocracies diverge along other dimensions as well. Many autocracies have a weak civil
society (Propositions 3 and 4), but some have a strong one (Proposition 2). Some autoc19
racies’ economic performances are relatively stable (Propositions 2 and 3), while others’
are more volatile (Propositions 4, 5, and 6). Some autocratic governments are persistently
clean (Proposition 2), some are stubbornly corrupt (Proposition 3), yet others go back
and forth between these two extremes (Propositions 4, 5, and 6). Some autocracies are
characteristically short-sighted when it comes to public investment (Proposition 2), some
occasionally manage to make longer-term investments (Propositions 4, 5, and 6), yet others
are completely dysfunctional and little if any public investments are ever made (Proposition 3). A simple model like ours provides a unified framework to understand all these
variations as different equilibrium outcomes in different parameter ranges.
2. There is no room for saints under democracy.
In a democracy, majority voters have no taste of electing saints into office. Saints are
saints because they protect the minority citizens from the predation of the majority ones,
and care about the future generations at the expense of the current one. All these stand
at odds with the majority’s interests. In a democracy, where majority citizens decide who
will be the next leader, saints stand no chance of being a leader. Even if they are elected,
it is only because voters know that their hands will be so tied (by populist pressure) as to
be ineffective in causing any “harm”. And, indeed, their hands will be as tied as those of
any other leader, making different kinds of leaders virtually indistinguishable.
In terms of our model, in the unique equilibrium under democracy, we have LY (0) = S,
and hence LY (ωt ) = B only if ωt = 1. This means that when the civil society is weak
(ωt = 0), and hence the leader’s hands are not tied, only a selfish candidate will be elected
into office, even if a benevolent one is also running. A benevolent candidate can possibly
get elected in equilibrium only when ωt = 1, which is also a time when he cannot implement
his favorite policies at will.
In the bulk of the political economy literature, where the predominant focus is on
democracies, the possibility of benevolent candidates is oftentimes assumed away. Our
theory explains why this is indeed without loss of generality. However, assuming away the
possibility of benevolent candidates is with loss of generality when we also study autocra-
20
cies, as there is room for these candidates under autocracy.
3. Civil society is always strong in all democracies.
In a democracy, regardless of the initial state ω0 , and regardless who initially occupy
the office, civil society will stay at or rebound to a strong level in the next period, and
then stays strong thereafter. This is true not only on the equilibrium path, but off the
equilibrium path as well. Even when a democracy is being knocked off the equilibrium
path by accident, civil society will quickly rebound to its originally strong level afterward.
In this sense, a strong civil society is a very robust signature of democracies.
The reason why civil society is always strong in democracy is rooted in something
seemingly unrelated, namely that majority voters have no taste of electing saints into office
(Lesson 2). Understanding that any future leaders must be normal selfish beings, neither
a benevolent nor a selfish current leader dares to suppress the civil society. Both are afraid
that a weakened civil society will make it easier for future leaders (who are definitely not
saints) to engage in self-dealing (Lemmas 1 and 2). This highlights a feature of democracy
that we think is under-appreciated, namely that the checks and balances afforded by a
strong civil society do not come easily. They are definitely not guaranteed by fiat. They
can be damaged and suppressed by those in power, just like how they are damaged and
suppressed in autocracies. However, they are, instead, nurtured and protected in democracies, because everyone understands that democracies do not elect saints to office, and these
checks and balances are these societies’ last line of defense against self-dealing leaders.
4. Civil society is often weak in autocracies, including those that out-perform democracies.
If a strong civil society is a signature of democracies, the opposite is true for autocracies.
This is true not only for the worst types of autocracies, but for the best types as well. Again,
this is so not by assumption, but is a equilibrium phenomenon instead. Indeed, regardless
of the political institution, leaders always prefer a weaker civil society. However, a dynamic
free-riding problem arises among leaders when it comes to suppressing the civil society, and
the autocratic leader-selection mechanism helps resolve this problem.
21
A weak civil society, in turn, explains the existence of both good and bad autocracies. It allows selfish leaders to engage in self-dealing, which squanders public funds at
the expense of the society (Propositions 3 and 6), and enables benevolent leaders to defy
populist demands and implement policies that are better for the society in the long run
(Propositions 4 and 5).
5. Even when an autocracy outperforms a democracy, it’s performance tends to be volatile.
In the best type of autocracy, the economy fluctuates between good and bad times.
This fluctuation is not due to business cycles, nor other aggregate economic shocks. It is
due to the fluctuation in governance quality instead. Because civil society is persistently
weak (Lesson 4), the governance quality is sensitive to what kind of leader is in office.
As the availability of benevolent candidates fluctuate over time, the country’s economic
performance fluctuates with it. However, what makes a good autocracy good is that,
whenever a benevolent candidate is available, he will be selected into office. Hence the
economy spends a fair share of time living with a good government as well.
It is worth emphasizing that, the best type of autocracy out-performs democracy not
because it is lucky enough to stumble on a succession of benevolent leaders. Indeed, luck has
nothing to do with that comparison. The best type of autocracy out-performs democracy
even when we take the average between good and bad times.
What makes a selfish incumbent leader willing to select a benevolent successor (when
one is identified) instead of selling the office to a selfish one? Self protection is the main
reason. Specifically, in our model, an incumbent leader would like to protect himself against
populist welfare policies in the future, which a selfish successor will implement because he
will be a member of the majority citizens. A more general message we bring about beyond
our model is that incumbent leaders may find themselves vulnerable after their retirement
as their interests then can be incongruent both with those of a selfish successor and with
populist demands. They will then have the urge to seek self-protection from a benevolent
successor who is ready to stand up against populist demands. If the self-protection motivation is strong enough (e big enough in our model), or the “market of political offices”
22
inefficient enough (b̂ and hence b small enough in our model), then an incumbent leader
will willingly refrain from selling the office to a selfish successor.
6. The worst autocracies are worse than democracies.
This is probably obvious by now, but it is still worth stating explicitly. Democratic
institutions may not bring the best to an economy, but they protect it against the worst.
The worst form of autocracy functions as follows: any incumbent leader is a normal selfish
being who, thanks to a weak civil society, engages in self-dealing at the expense of the society. Moreover, he is not afraid of continuing the suppression of the civil society. Although
doing so makes it easier for future selfish leaders to engage in self-dealing as well, which
the current leader does not like, he is more than compensated for that by being able to
sell the (now delicious) office at a better price. A reasonably efficient “market of political
offices” definitely plays some role in facilitating this kind of autocracy, as captured by the
condition b ≥ max{G, e} in Proposition 3.
7. The best and the worst autocracies may look like each other initially.
This is probably the most troubling lesson we have learned. Suppose we are studying
a particular autocracy and have the following findings: its civil society is deliberately
suppressed, its top government officials are surprisingly uncorrupt given the lack of checks
and balances, there are no widespread evidences that they are engaging in self-dealing, its
public investments are farsighted, its environmental policies are the envy of many if not
all, and its economic growth leaves the rest of the world in awe. What can we say about
the long-term performance of this autocracy? Can we say for sure that this is an example
of the best type of autocracy?
All we can say is that this autocracy seems to be in the generalized state where ωt = 0
and a B-leader is in office. This is consistent with the “good dynamics” in Figure 2b,
where the autocracy is currently in the generalized state at the top right corner. But it
is also consistent with the top right corner in Figure 2c, where the autocracy is waiting
for the inevitable fate of being absorbed into the self-perpetuating “bad dynamics”. In
23
other words, before we see what happens when an S-leader comes to office, this autocracy
arguably has not been “tested” yet. The true “test” that will tell the true type of this
autocracy is whether an S-leader (who will eventually come) will return the office to a
B-successor or to sell the office to the highest bidder.
Of course, the “test” is also made complicated by the fact that benevolent candidates
are not always available. So we may be looking at a genuinely “good dynamics”, and
yet witnessing a consecutive stream of self-dealing leaders, only because no benevolent
candidate has been available. The bottom-line is that, to distinguish between a good
autocracy and a bad one, one needs to look beyond a few isolated episodes. The moving
averages of an autocracy’s various measures over a long horizon are needed.
5
Conclusion
In this paper, we have demonstrated, by way of a simple model, that a single key
difference between autocracy and democracy in terms of political selection has a lot of
explanatory power. In autocracy, incumbent leader selects the future leader, whereas in
democracy, the future leader is chosen by citizens by majority rule. This single difference
can explain why democracies tend to be alike, while autocracies come in many different
colors, with some out-performing democracies in terms of economic performances, while
others fare much worse. Autocracies, even when functioning well, tend to be relatively
volatile in terms of economic performances, and are in general accompanied by a weak civil
society.
Appendix A: Equilibria in Autocracy
We first verify that the five absorbing dynamics are the only possible absorbing dynamics in any pure-strategy Markov-perfect equilibrium. To see that, observe that for every
absorbing dynamics there is a corresponding subset of generalized states that communicate
with each other. If the communicating subset contains all four generalized states, then the
24
absorbing dynamics can take only two forms, which are already depicted in Figures 1 and
2d.
Lemma 3 In any equilibrium, if the corresponding communicating subset contains the generalized state (1, B) (resp. (0, B)), then it contains (1, S) (resp. (0, S)) as well.
Proof. Suppose (1, B) is reached infinitely often. Then Σi = (1, B) for some i = B, S, and
an i-leader is selected into office infinitely often. But whenever an i-leader is in office in
period t, with probability 1 − q, the period-(t + 1) leader will be an S-leader. Hence (1, S)
is reached infinitely often as well. The case for (0, B) is the same.
No tripleton communicating subset is possible. By Lemma 3, any tripleton communicating subset must contain both (1, S) and (0, S). If it also contains (1, B), then ΣS = (1, B),
otherwise (1, B) will not be reached again once an S-leader takes office. But if it contains
(1, B) then it does not contain (0, B), so ΣB = (1, B). But ΣS = ΣB = (1, B) means the
communicating subset can be further reduced to the doubleton {(1, B), (1, S)}, a contradiction. Similar arguments apply to the case where the tripleton communicating subset
contains (0, B).
By Lemma 3, there can only be two possible doubleton communicating subsets, which
are already depicted in Figures 2a and 2b.
By Lemma 3, there can only be two possible singleton communicating subsets: {(1, S)}
and {(0, S)}. We have ruled out {(1, S)} with our earlier tie-breaking assumption that
ΣS 6= (1, S); whereas {(0, S)} is already depicted in Figure 2c.
Proof of Proposition 3
Consider the equilibrium ΣB = (1, B), ΣS = (0, S) first.
Suppose a B-leader is in office in period t. Let W be the discounted welfare from period
t + 1 onward in equilibrium:6
W = q(e − λ + G + βW ) + (1 − q)(e − λ + G + βW )
6
For notational simplicity, we ignore any occurrence of R that may arise due to any long-term investment
made in periods t − 1 and t, as this is irrelevant for incentives.
25
where the discounted welfare from period t + 2 onward will be W and W if the period(t + 1) leader is a B- and an S-leader, respectively. If the B-leader deviates to ΣB = (0, B),
anticipating that future leaders will follow the equilibrium strategies, the discounted welfare
from period t + 1 onward will become:
W 0 = q(e + β 2 R + βW ) + (1 − q)(e − λ + βW ).
Deviation is unprofitable iff W ≥ W 0 , which is equivalent to G ≥ q(λ + β 2 R) = Q.
Similarly, consider the the equilibrium ΣB = (0, B), ΣS = (0, S) . Suppose a B-leader
is in office in period t. Let W be the discounted welfare from period t + 1 onward in
equilibrium:
W = q(e + β 2 R + βW ) + (1 − q)(e − λ + βW )
where the discounted welfare from period t + 2 onward will be W and W if the period(t + 1) leader is a B- and an S-leader, respectively. If the B-leader deviates to ΣB = (1, B),
anticipating that future leaders will follow the equilibrium strategies, the discounted welfare
from period t + 1 onward will become:
W 0 = q(e − λ + G + βW ) + (1 − q)(e − λ + G + βW ).
Deviation is unprofitable iff W ≥ W 0 , which is equivalent to q(λ + β 2 R) = Q ≥ G.
Proof of Proposition 5
Suppose a B-leader is in office in period t. Let W be the
discounted welfare from period t + 1 onward in equilibrium:7
W = q(e + β 2 R + βW ) + (1 − q)(e − λ + βW 0 )
where the discounted welfare from period t+2 onward will be W and W 0 if the period-(t+1)
7
See Footnote 6.
26
leader is a B- and an S-leader, respectively; and W 0 is given by
W 0 = q(e − λ + G + βW ) + (1 − q)(e − λ + G + βW 0 ).
If the B-leader deviates to ΣB = (1, B), anticipating that future leaders will follow the
equilibrium strategies, the discounted welfare from period t + 1 onward will become W 0 .
Deviation is unprofitable iff W ≥ W 0 , which is equivalent to q(λ + β 2 R) = Q ≥ G. This
last inequality also implies q(λ + R) > G, which in turn guarantees that
wmd − wdem = q q(λ + R) − G > q q(λ + β 2 R) − G = q(Q − G) ≥ 0.
Finally, for an S-leader not to deviate to ΣS = (0, B) or ΣS = (0, S), it must be that
neither the benefit of no old-citizen taxation nor the bribery income from selling the office
suffices to compensate for his loss of short-term public good:
G ≥ max{e, b}.
Proof of Proposition 6
Suppose a B-leader is in office in period t. Let W be the
discounted welfare from period t + 1 onward in equilibrium:8
W = q(e − λ + G + βW ) + (1 − q)(e − λ + G + βW 0 )
where the discounted welfare from period t+2 onward will be W and W 0 if the period-(t+1)
leader is a B- and an S-leader, respectively; and W 0 is given by
W 0 = q(e + β 2 R + βW ) + (1 − q)(e − λ + βW 0 ).
If the B-leader deviates to ΣB = (0, B), anticipating that future leaders will follow the
8
See Footnote 6.
27
equilibrium strategies, the discounted welfare from period t + 1 onward will become W 0 .
Deviation is unprofitable iff W ≥ W 0 , which is equivalent to G ≥ q(λ + β 2 R) = Q. This
last inequality, however, is consistent with both wmb > wdem and wmb < wdem . Indeed,
wmb − wdem = (1 − q) q(λ + R) − G ,
and hence wmb > wdem if q(λ + R) > G ≥ Q; and wmb < wdem if G is sufficiently large.
Finally, for an S-leader not to deviate to ΣS = (0, B) or ΣS = (0, S), it must be that
neither the benefit of no old-citizen taxation nor the bribery income from selling the office
suffices to compensate for his loss of short-term public good:
G ≥ max{e, b}.
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