The Political Economy of Ethnic Polarization, Natural Resource Curse and Income Inequality

Abstract

This paper analyzes the impact of ethnic polarization in triggering the natural resource curse which consequently results in higher levels of income inequality. We use a dynamic inÖnite time horizon model in a general equilibrium framework setting. A backward-induction process is used with three essential elements. Firstly, we decide upon the size of the elite through cost-beneÖt analysis. Secondly, the elite decide whether to indulge in rent-seeking or not by comparing their respective utilities. Lastly, the elite decide upon the optimal level of expropriated rents through a utility maximization problem. We are able to show that it is only in ethnically polarized societies, the economy is stuck in a high-corruption equilibrium by raising the returns from rent-seeking. Conversely, in ethnically homogeneous societies, a low-corruption equilibrium will exist conduit lower concentration of political power