In Discussion Paper No. 1495, Thierry Verdier and Alberto Ades analyse 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 and two productive sectors is presented where political participation is a costly activity. The driving forces of entry into politics are determined and the authors examine how the size of the political elite affects the level of economic 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.

The authors show why one society may converge to an equilibrium with low distortions and social equality, while another may end up with high economic distortions and social polarization. In the final section, the model is 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.

The Rise and Fall of Elites: A Theory of Economic Development and Social Polarization in Rent-Seeking Societies
Thierry Verdier and Alberto Ades