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Inequality, extractive institutions, and growth in nondemocratic regimes

Mizuno, Nobuhiro and Naito, Katsuyuki and Okazawa, Ryosuke (2012): Inequality, extractive institutions, and growth in nondemocratic regimes.

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Abstract

This study investigates the effect of inequality on economic growth in nondemocratic regimes. We provide a model in which a self-interested ruler chooses an institution that constrains his or her policy choice. The ruler must care about the support share of citizens in order to keep power. Under an extractive institution, the ruler can extract a large share of citizens' wealth, but faces a high probability of losing power because of low public support. We show that inequality affects the ruler's trade-off between the expropriation of citizens' wealth and his or her hold on power. Large inequality among citizens makes the support share for the ruler inelastic with respect to his or her choice of institution. Thus, the ruler chooses an extractive institution, which impedes investment and growth. These results provide an explanation for the negative relationship between inequality and growth and the negative relationship between inequality and the quality of institutions, both of which are observed in nondemocratic countries.

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