Abstract Liberal democracies increasingly curtail civil liberties in response to cultural tensions. I show that such repression can be conceived as a Pigouvian political externality: governments enjoy immediate political benefits from reduced social tension but systematically undervalue long-run costs of institutional erosion. The externality arises because finite tenure and reduced post-tenure valuation make politicians discount institutional quality more steeply than society. I formalize this mechanism in a dynamic linear-quadratic model in which repression lowers visible tension today while degrading future institutional quality, and I derive a closed-form “social cost of repression,” analogous to the social cost of carbon in environmental economics. Pigouvian logic, typically used to diagnose market failure, is here applied to a government failure in democratic self-regulation. I then characterize a class of market-based instruments—sovereign “democracy covenant” bonds, whose coupon rates rise automatically when civil-liberties indices deteriorate—that embed the shadow cost of repression into borrowing costs and thereby better align short-run political incentives with long-run democratic resilience.
Thomas Barnebeck Andersen (Tue,) studied this question.