Hobbes to Rousseau: Inequality, Institutions and Development

Abstract

This article studies the endogenous evolution of economic and political institutions and the interdependencies with the process of economic development. Favourable economic institutions in the form of a state of law and absence of societal conflict arise in equilibrium. Democracies are neither necessary nor sufficient to implement a state of law, even if they may be instrumental. Efficient oligarchies can emerge and persist supported by the consensus of all groups. A taxonomy of politico‐economic equilibria shows the endogenous evolution of institutions depending on economic inequality and natural resource abundance, implying a non‐monotonic relationship between inequality and institutional quality.