Allow players to earn the authority to, for example exile a player from a city [..] or force them to fight in an arena
Good idea, but that will be an "official means" of harrassing and oppressing individuals or groups, and for gaining power in a feedback loop. Which is just what it will be used for.
Say I'm the leader of the biggest guild in the region. The second biggest guild is competing with us, but the 3rd-5th biggest guilds are trying hard to make friends (just because we're the biggest).
So I'm placing myself as El Supremo in Capital City.
Now, as it happens, the iron and silver mines close to Capital City are the best in the world, so what do I do? I ban everyone not in my guild from accessing it. Or even better... off with ye head, says I. In fact, I shall have all traitors who do not bow to El Supremo executed.
Now I have all the iron and all the silver, and everyone in my way is being killed by NPCs. And now, the entire world!!!
[...] strip players of hard earned skills and items.
What if I have the power to do that and someone keylogs me and hijacks my account? They'll strip 25,000 people off their earnings over night, which is probably the end of the game. Nobody will ever pay one cent to play that game again.
elections [...] power distribution
Those are antipodal things. You must not assume that democracy works. It does not work in real life, so why should it work in a game.
Look at how Mr. Bush or Mr. Putin were elected. They both demonstrably cheated (one with dead people voting, the other with groups of people making tours all over the country and voting 50-100 times in different towns). So what? Nobody cares. Everybody knew they cheated. It was in the news for a couple of days, and... so what? They were still the "legitimate" leaders of their countries for the entire term afterwards.
It's not any different from King by the Grace of God, you only believe it is. Nobody cares what you think. Nobody cares if you agree. Nobody cares if you die in a dirty trench with your intestines spilt on the ground only because some fucker who got elected as president decided that you must go to war in a country that you've never heard of, for a reason that nobody understands.
The only things that has changed during the 800 years since the crusades are that back then it was "for the will of God" and today it is "for Freedom and God", and "president" has twice as many letters as "king". More words, but still the same shit.
Now imagine a game where you can just create 100 or 200 accounts that vote for you. Or where you can press people into voting you because you tell them you'll otherwise seek them out every time they enter a PvP area? Or where you can just buy people's votes (people who don't really care, it's only a game, right) by giving out free items?
This just won't work as long as there are people with a serious striving for power (and there will always be). Don't assume that people will not just create 100 accounts to be "king".