Growth and Endogenous Political Institutions

In this paper we study the dynamics of political institutions and the different public policies they imply. While political institutions are influenced by economic development, they are in turn a key determinant of the development process. In particular, democratic institutions implement different public policies than oligarchies, and therefore imply different economic outcomes. Economic development in turn increases the likelihood of transitions from oligarchy to democracy because it changes the relative costs for and benefits from the public policies arising under democratic regimes. We show that different scenarios of political development can arise endogenously: democratic transitions under the shadow of social conflict and democratic transitions initiated by the oligarchic elite. Moreover, we show that democratic regimes tend to provide more efficient public policies, and more redistribution than oligarchic regimes. The results are compared to historical and empirical evidence, and the consequences of the simplifying assumptions are discussed in detail.