Network structure and performance of crony capitalism systems credible commitments without democratic institutions

Abstract

Networks underlie notable cases of rapid development without democratic institutions, a phenomenon known as crony capitalism that has two distinctive features: (1) dispensation of selective privileges, and (2) social connections among beneficiaries. This paper advances a formal theory that explains how crony networks can induce large-scale effects that can both propagate risk of predation and incentivize private protection to withstand it. Dense networks that activate both relational mechanisms translate into aggregate outcomes wherein governments respect property rights for favored parties. From formal theory, I derive equilibrium predation conditions for a computational model that examines how variable network structures impact the number of protected privileges. A statistical analysis of computer simulations lends support for the posited relational mechanisms that scale up protection in successful cases of crony capitalism.