Discussion Paper, School of Business & Economics: Economics 2013/16
In this paper, I argue that religion matters for the emergence of democracies and dictatorships. Religion is defined as a stochastically set demand for public goods. Different types of religious collectives reflect different tradeoffs between centralized resource distribution and market rewards. Religions are defined as collectivist, when their respective collectives facilitate the hierarchical provision of common pool resources toward their members at the expense of market incentives. Religions are defined as individualist, when their respective collectives recruit and preserve their members on the basis of market incentives. Islam, Orthodoxy and Catholicism are treated as collectivist religions, whereas Judaism and Protestantism as individualist ones. I provide a historical overview that designates the Jewish kibbutz as the collective of democracy and the Russian-Orthodox monastery as the collective of dictatorship. Assuming a collectivist economy, I solve the radical government and modernization stochastic games. I find that modernization occurs in a collectivist economy when the threat of a radical government is imminent and when the leader has high extraction rents over the economy. In order to stay in power, the leader credibly commits to provide more public goods in the future, and thus modernization occurs. Underdevelopment occurs at intermediate levels of state enforcement, modernization at low levels and centralization at high levels of state enforcement. The emergence of a radical government is more likely in a collectivist rather than in an individualist economy.