Endogenous Property Rights and Inequality in Non-democratic Regimes: Theory and Evidence

Abstract: Does higher inequality in wealth distribution imply worse property rights protection in non-democratic regimes? We construct a model of asymmetric rent-seeking contest with endogenous institutional quality, which predicts that more unequal societies indeed are more likely to end up in conflict equilibrium (with poor property rights and rent-seeking behavior). However, when the economy rests in conflict, higher wealth share of the elite improves institutions, while lower size of the elite worsens them (both situations correspond to higher inequality). Moreover, the intensity of conflict is negatively related to wealth inequality between the ruling elite and the masses. Therefore, in countries with very narrow ruling class lower inequality does not correspond to better institutions and only exacerbates conflict. In countries with wider access to power strong institutions may appear either under very high or very low wealth share of the elite, while intermediate cases correspond to worse property rights protection. We also provide some preliminary evidence that support our results, which are then used to interpret several cases of institutional change in historical perspective and nowadays. Keywords: institutions, property rights, inequality, rent-seeking, wealth distribution, conflict JEL Classification: D31, D72, D74, O17, P26