Model Unvertainty, Political Learning, and Institutions: A Broader View on Mancur Olson's Theory of Institutional Sclerosis

In his Rise and Decline of Nations, Mancur Olson argues that politically stable countries suffer from declining growth rates caused by the growing influence of distributional coalitions that accumulate over time. The empirical literature supports the notion of a negative relationship between a country's duration of political stability and its growth rates but finds only weak support for a negative influence of distributional coalitions on growth. This paper sketches a simple model of party competition under model uncertainty, which may explain this mixed empirical picture. It shows that politically stable democracies are less well equipped to adjust to shifts in their economic environment than democracies with a shorter history of political stability. In a further step, the paper relates the major theme of this theory and Olson's theory to the more recent literature on institutions and growth. Directions for further research are discussed.