Oligarchy and Democracy: Trade-Offs for the Political Elite

Abstract

This paper analyses the impact of the fear of losing social status (la peur du declassement) on the levels of democratisation and economic growth. In a formal model where education makes an individual’s vote count and generates positive externalities for all agents in the economy, I examine the incentives for the elites to initiate a democratic transition by educating the masses when they care about both their status (relative position in the income distribution) and their absolute incomes. In the context of imperfect capital markets, the paper analyses the equilibrium patterns of political outcomes, income distribution, and growth as a function of initial income, inequality, distortions from tax structures and externalities from education. The model illustrates that a higher weight on status preference leads to a lower level of democratisation and economic growth.