Creditor protection and the dynamics of the distribution in oligarchic societies

This paper analyzes the impact of weak contracting institutions on economic development and the wealth distribution in a Ramsey-type growth model. We show that, at low levels of accumulation, weak contracting institutions strongly favor the economic elite: By preventing market entry, such institutions provide the “oligarchs” with cheap access to credit—which is highly beneficial as long as capital is scarce. At the same time, a broad cross-section of society faces only low returns so that capital accumulation is slowed down and the capital stock gets concentrated in the hands of the elite. At higher levels of development, however, weak contracting institutions are harmful to all segments of society and institutional reform becomes unanimously supported. So the model helps to explain the pervasiveness of weak contracting institutions in less-advanced economies.