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Inequality, Political Instability, and Long-Term Development

The "la Caixa" Foundation supports ground-breaking research at the Barcelona School of Economics through the "la Caixa" Foundation Research Grants on Socioeconomic Well-being.

Project overview

This project aims to analyze the link between inequality, social conflict, and long-run development. It comprises of two main parts. The first part investigates the factors that explain early-state formation and development, as well as the connections between state antiquity and long-run development. The second part involves a deeper inquiry into the link between economic development, economic inequality, and social conflict.

Another part of this project focuses on potential class conflict and why we can see so little of it, in spite of growing inequality in individual incomes. It also examines the effect of the shadow of potential conflict on the design of political institutions and whether there are political institutions that induce peace while seeking efficiency, therefore minimizing the social waste in conflict resources.

Main results

  • The development of a new working paper: Floods, droughts and environmental circumscription in early state development: the case of Ancient Egypt, which introduces a theoretical and an empirical analysis on the determinants of early state formation. 
  • The development of a new working paper: Out of the nightlights shadow: Mapping spatial economic development in dollars, which introduces new tools and data to measure  economic well-being in the developing world.
  • A new visualization tool was created: Mapping spatial economic development in Africa.
  • A Model of Class Conflict was developed. Individuals differ in income and can either accept the given disposable income or rebel, thus obtaining the expected payoff from the rebellion game. The model provides an explanation of the non-monotonicity of conflict with respect to income inequality. 
  • The development of a new working paper: Optimal Political Institutions in the Shadow of Conflict, which provides a novel explanation of why countries might be unable to establish peace-granting institutions that solve conflicts of interests.

Summary, output, and dissemination

Research summary

Early state development

This project successfully addresses the issue of early state formation. It focuses on the role of weather-related productivity shocks for early state development in ancient Egypt. It presents a framework of extractive state consolidation predicting that political stability should be high whenever environmental circumscription is high, for example, whenever there is a large gap between the productivity of the area under state control (core) and that of the surrounding areas (hinterland). In such periods, the elite can impose high levels of taxation that the population will be forced to accept as an exit to the hinterland is not a feasible option. 

In order to test this hypothesis, novel proxies were developed for both the historical productivity of the Nile banks and of the Egyptian hinterland on the basis of high-resolution paleoclimate archives. Empirical analysis was used to investigate the relationship between these proxies for environmental circumscription and political outcomes such as ruler and dynastic tenure durations and the area under state control during 2685 - 760 BCE. The results show that while extreme Nile floods are associated with a greater degree of political instability, periods with greater rainfall in the hinterland (i.e. a lower effective environmental circumscription) cause a decline in state capacity and a delayed increase in political instability. 

The results from this part of the research highlight the relevance of theories pointing to state extraction as a key driver of state formation. A paper was produced titled “Floods, droughts and environmental circumscription in early state development: the case of Ancient Egypt” which is currently in its second revision in the Journal of Economic Growth (jointly with Ola Olsson).

Ethnic conflict and group size

This project explores the issue of what groups in society are more likely to precipitate internal conflict. In particular, it focuses on the relationship between the size of the group. 

The answer is not obvious: on the one hand, larger groups are more powerful and therefore more likely to win in conflict, while smaller groups can be cohesive and have larger incentives per capita, allowing them to benefit more from conflict. The results from this part of the research show, both theoretically and empirically, that the answer depends on the nature of the prize at stake. In the theory, groups can challenge some status quo allocation of public or private benefits. A challenge is followed by conflict, with the spoils accruing either to the group –in case of victory—or to the rest of society, in case the group is defeated. When the prize is private, its per-capita value is affected by group size. When the prize is public at the level of the group, its per-capita value is undiluted by group size. When an excludable or private prize is at stake, a smaller group has a greater incentive to engage in conflict. Conversely, when the dispute is over group-specific public prizes, larger groups are associated with conflict. The main findings are summarized in the following paper: A paper was written with Debraj Ray summarizing the main findings: “Groups in conflict: private and public prizes”, which was published in 2022 in the Journal of Development Economics. 

Class conflict and income inequality

The intuition that inequality breeds social conflict has been widespread since Marx. Yet, the extensive literature, mostly in political science, devoted to identifying the link between income inequality and conflict has been unable to obtain any solid result (as reported by Lichbach 1989). 

More recent research such as Alesina and Perotti (1996) has identified a link between income inequality and political instability. However, since the end of the Cold War, the academic interest in nexus income inequality and class conflict is no longer a high-priority research topic.

A potential line of research to explain the very limited incidence of class conflict is the argument advanced by Acemoglu and Robinson (2000). Their argument is that voting rights were extended to the poor, in the majoritarian system as a commitment device by the rich on the degree of redistribution that would refrain the poor from rebelling. The implication of this argument is that there should be higher redistribution (a higher marginal tax rate in a linear tax system for instance) as a response to higher inequality in pre-tax market incomes. In fact, this is the result obtained by the Political Economy literature with respect to the marginal tax rate that would obtain a majoritarian support in a democracy, as in Romer (1975), Roberts (1977), and Meltzer and Richard (1985). The size of the (constant) marginal tax rate depends inversely of the median income and hence of pre-tax income inequality. Yet, in this case too the many empirical tests of this result have failed to obtain a significant relationship, as shown in Perotti (1996). As it appears the poor majority cannot increase the redistribution of incomes when the market incomes become more unequal.

Mayoral and Esteban’s paper “A Politico-Economic Model of Public Expenditure and Income Taxation”, Journal of the Spanish Economic Association SERIEs, (2019) redefines the politico-economic modeling of redistribution. The tax revenue is only partly directly redistributed to individuals and the rest is used to finance the public provision of goods such as health, education, security… Individual preferences over these goods depend on the level of disposable income, which is based on the consumption of private goods. The valuation of a redistribution policy depends on own consumption and the kind of goods supplied by the government. The overall individual valuation depends on the marginal rate of substitution between the goods supplied by the government and private consumption. In other words, the majoritarian outcome of voting depends on the level of privatization of the supply of goods that could otherwise be publicly furnished. The paper empirically tests the nexus between income inequality and taxation, conditional on the substitutability between public and private. Income inequality is then significant in explaining the observed marginal tax rate. This result is important to the initial question as to why little class conflict is observed and disconnected from income inequality. This paper indicates that the potentially conflictual response to increased inequality is tempered by increased redistribution, not necessarily through a monetary transfer. This is the reason why little class conflict is observed.

Centrist versus Secessionist Conflict

The paper “A Dynamic Theory of Secessionist vs Centrist Conflict” with S. Flamand, M. Morelli, and D. Rohner (revise and resubmit at the Journal of the European Economic Association) analyzes the conditions under which the opposition player prefers to trigger conflict in order to control the center and impose the preferred policies versus seceding and thus severing future interactions with the other player. This problem is particularly relevant in the case of ethnic conflicts since most ethnicities have a “homeland” that could eventually become a separate state. This project looks at the effect of different types of payoffs and the impatience rate. It empirically tests the results of the two-period model.

Optimal Institutions in the Shadow of Social Conflict

Most of the literature on the theory of conflict identifies the intensity of conflict with the amount of resources wasted in equilibrium in a strategic game over policy alternatives. This is the case of Esteban and Ray (1999, 2011). However, if we are interested in the onset of conflict the model should also incorporate the payoffs that the players will obtain if they accept the status quo policy, rather than rebelling and triggering a costly conflict. In this respect, see Anbarci, Skaperdas, and Syropoulos (2002), Reynal-Querol (2002), or Esteban and Ray (2008). In these papers, the basic conflict model is supplemented with an assumption of the status quo. This is either a specific form of government, majoritarian democracy, proportional democracy, or autocracy determining the ‘peace’ payoffs for the players, or exogenously established distributions of the peace surplus using three different solutions to the bargaining problem (as in Anbarcy, Skaperdas, and Syropoulos). The paper Optimal Political Institutions in the Shadow of Conflict by Esteban and Canidio, makes endogenous the status quo institution that allocates the peace surplus if this is preferred to the payoff of the equilibrium of the conflict game. The paper shows that there is no efficient political institution that guarantees peace for all profiles of the players.

Publications, working papers and website

Publications

Working Papers

Website

Awards and Recognitions
Events

Participation in the CSH Winter School on the Evolution of Social Complexity, Vienna May 2022. (Laura Mayoral)

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