Hobbes to Rousseau: Inequality, Institutions and Development

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.