Oligarchy, Democracy, Inequality and Growth

Abstract

This paper analyzes the dynamics of inequality, democratization and economic development in a political economy model of growth where education is both the engine of growth and a determinant of political participation. In a context with imperfect capital markets, we investigate the incentives for an educated oligarchy to subsidize the poor's education and to initiate a democratic transition. We characterize the equilibrium patterns of political institutions, income distribution and growth as a function of the initial income and inequalities. In particular, we identify circumstances under which the Elite promotes the endogenous emergence of a middle class for purely political economy reasons. A simple linear infinite horizon framework is then presented. In this setting, we discuss the importance of historical dependence for long-run social stratification and redistribution.

Keywords: Inequality, Economic development, Political economy, Redistribution, Democratization

JEL Classification: O11, O15, D72