Institutions and growth in limited access societies

We build a dynamic political economy model with a two-class society: workers and the elite. In the model, the formation of the elite, the rate of innovation and …scal policy are endogenous. We focus on the con‡ict within the elite over two fundamental engines of economic growth: innovation and public investment. The model creates a mapping between institutions and economic outcomes which is consistent with the observed patterns of growth. The model also shows that separation of control over various policies maybe optimal for the elite and that, forced to meet the demands of the working class, the elite may delegate policy control to some of its members, even though such delegation exacerbates the con‡ict within the elite and leads to policy failures. The elite commits to institutions that allow for such failures in order to prevent more harmful outcomes, such as rapid entry and subsequent deterioration of its economic and political power.