Macro shocks and costly political action in non-democracies

This paper presents a theory of political instability in autocracies where the disenfranchised express their political preferences for a leadership replacement through costly political action. We focus on the business regulatory environment as an arena for autocratic rent-creation, as a source of information asymmetry between the autocrat and the disenfranchised, and as a potential political grievance for the disenfranchised. Within this context, we revisit the role of macro shocks as a catalyst for political instability and propose a novel informational channel through which macro shocks may trigger costly political action when the autocrat chooses to create rents through regulation that deteriorates the mean macroeconomic outcome. We then provide an empirical investigation of our theoretical hypotheses employing fixed-effects panel regressions and an instrumental variable strategy over a sample of non-democratic countries. Consistent with our theoretical hypotheses, we demonstrate that adverse economic shocks increase the probability of mass protest episodes, but that the magnitude of the effect depends on the extent to which business regulation is market-distorting.