The Rise and Fall of Elites: A Theory of Economic Development and Social Polarization in Rent-seeking Societies

This paper analyses how political institutions, wealth distribution and economic activities affect each other during the process of development. A simple general equilibrium model of rent-seeking political elites with two productive sectors (modern and traditional) is presented. Political participation is viewed as a costly activity. We show what drives entry into politics and how the size of the elite affects the level of distortions. The model also highlights the role played by the initial distribution of wealth in determining the long-run pattern of political participation and economic performance. We show why one society may converge to an equilibrium with low distortions and social equality, while others may end up with an institutional framework that brings about high distortions and social polarization. The model is then extended to account for the provision of public goods, to analyse the effects of rent-seeking on technological change, and to allow for random shocks in intergenerational transfers.