A Political Theory of Productivity Divergence

Abstract

We develop a political theory of productivity divergence grounded in the role of authority in shaping internal incentives within organizations. Large-scale productive activity is carried out within organizations and requires internal coordination. Coordination depends on authority that is not fully determined by contracts or formal institutional rules but must be constructed and sustained through politically strategic actions by superiors. Authority maintenance shapes the intensity of internal competition and thus organizational productivity. In our model, superiors strengthen performance-based competition when authority is more contractual. When authority relies more on individualized loyalty, the optimal level of competition depends on whether meritocratic incentives are compatible with preserving loyalty-based control. This mechanism not only reinforces the conventional view that strong legal institutions promote economic growth but also provides a microfoundation for both sustained high and low productivity under weak legal enforcement. Authority accumulation emerges as favoritism that is intrinsic to organizations and can sustain control without distorting productivity. Our theory further implies politically structured inequality and institutional instability, as favoritism generates differences in individual outcomes and authority accumulation can erode the rule of law.