Income, inequality, and the stability of democracy — Another look at the Lipset hypothesis

Abstract

This paper studies the endogenous emergence of political regimes, in particular democracy, oligarchy and mass dictatorship, in societies in which productive resources are distributed unequally and institutions do not ensure political commitments. The political regime is shown to depend not only on income levels, but also, in particular, on resource inequality. The main results imply that under any economic environment a distribution of resources exists such that democracy is the political outcome. This distribution is independent of the particular income level if the income share generated by the poor is sufficiently large. On the other hand, there are distributions of resources for which democracy is infeasible in equilibrium regardless of the level of economic development. The model also delivers results on the stability of democracy. Variations in inequality across several dimensions due to unbalanced technological change, immigration or changes in the demographic structure affect the scope for democracy or may even lead to its breakdown. Among other historical examples, the results are consistent with the different political regimes that emerged in Germany after its unification in 1871.