A Tale of Markets and Jungles in a Simple Model of Growth∗

Institutions affect prospects for economic growth and development. This paper collapses potentially complex interactions of different institutions into a condition on the primitives that determines whether a society supports markets. Agents differ in land holdings, skill, and power, e.g. physical strength, wealth, or status. A competitive market assigns land efficiently to the skilled, not necessarily to the powerful. Therefore a market allocation is required to be stable with respect to coalitional expropriation. Stability of markets is favored by more equal distributions of power, and higher congruence of land and power. In a dynamic setting, the long run behavior is either a sequence of stable markets, or a limit cycle where markets and expropriation alternate. More equal initial period power distributions and lower mismatch between land supply and demand facilitate sustainability of markets, enhancing efficiency and dampening macroeconomic fluctuations.