Even when initial conditions are favorable and a state is potentially developmental with the genuine capability to elicit private sector investment, this may not materialize and an equilibrium of low, or no, investment will prevail. But the equilibrium outcome-analogous to the prisoner's dilemma-is investment by neither. The model highlights the dilemma that although state and private sector alike may want economic growth, both must simultaneously invest to achieve it. Our model focuses on why a “soft” state serving narrow social groups so often obtains in less-developed countries and under what conditions a “hard” or developmental state can emerge. We use a game-theoretic model to analyze the role of credibility, reputation and investment coordination in a developmental state.
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