The economics of Theocracy

This paper models theocracy as a regime where the clergy in power retains knowledge of the cost of political production but which is potentially incompetent or corrupt. This is contrasted with a secular regime where government is contracted out to a secular ruler, and hence the church loses the possibility to observe costs and creates for itself a hidden-information agency problem. The church is free to choose between regimes – a make-or-buy choice – and we look for the range of environmental parameters that are most conducive to the superiority of theocracy and therefore to its occurrence and persistence, despite its disabilities. Numerical solution of the model indicates that the optimal environment for a theocracy is likely to be one in which the “bad” (high-cost) state is disastrously bad but the probability of its occurrence is not very high. A broad review of the historical evidence yields some suggestive support to the predictions of the model. Finally, the model is shown to be applicable to the make-or-buy-government choices of other groups, such as organized labor and the military