ultimately endogenous to preferences, and how changes in policy outcomes and institutions of government are ultimately driven by changes in preferences.

The entire literature on the political economy of reforms, and the persistence of under-development, can arguably be summarized quite succinctly as: policy distortions or sub-optimal outcomes are the result of bargaining among elites for greater private rents from public resources (World Bank, 2017; Rajan, 2009; Sturzenegger and Tommasi, 1998). The World Development Report 2017, Governance and the Law (World Bank, 2017), reviews the literature, emphasizing explanations rooted in unequal distribution of economic ednowments as the source of unequal political power. Elites are thus defined as those who are endowed with power, while non-elites are not. It is therefore a useful starting point to show how elite capture and manipulation is represented within this paper’s framework. But to preview where we go from here, I show further below how the framework allows us to endogenize who are the elites, rather than assume this as an exogenous or fixed endowment, and how preferences in society-- among incumbent elites, challengers or potential future elites, and non-elite citizens—are what ultimately drive who contests power, on what policy bases, and to achieve what policy outcomes. The same framework accommodates both an outcome of elite capture of private rents, as well as its polar opposite--of a good policy outcome being the result of well-intentioned elites pursuing public goods, while the demands of non-elite citizens at large in society can be the source of policy distortions.

In the framework here, elite capture is represented as monopolistic or oligopolitistic selection of elitepreferred policy points on the demand curve. Preferences—those of elites—are thus fundamental drivers of policy outcomes. However, explaining outcomes as arising from the preferences of predatory elites to extract private rents from public policies, is not satisfying; one would want to know how the elites are able to get away with low provision of public goods if there are widespread preferences among non-elite citizens for more public goods. One would also want to endogenize elite status, rather than assume that elites are exogenously given, such as through some intial distribution of economic endowments. Much of the literature focusing on political institutions, and not preferences, describes a specific equilibrium in which an initial distribution of economic and political power endowments is taken as fixed and the selection of public policy is then derived from those fixed institutions. The framework here is sufficiently general to accommodate those outcomes—as price setting through oligopolistic competition—but goes further to show how the equlibium can change. Outcomes can change towards more public goods both through greater pressure on oligopolists from non-elite citizens—the demand side—but also through new challengers who can potentially emerge to contest for elite status, or policymaking powers—the supply side. The extent to which these pressures are applied (or not, leading to persistence of unequal policies) depend upon whether preferences among citizens are sufficiently far from status-quo policies.

Let’s consider three scenarios: (1) highly distortionary policies and captured state institutions through which the benefits from public policies are concentrated in a small proportion of citizens; (2) middlinglevels of policy distortion and concentration of benefits among a larger group of citizens, an expanded elite, but with systematic deprivation of the large majority of non-elite citizens; and (3) relatively lower levels of policy distortion and wider sharing of benefits from public policies with non-elite citizens, but nevertheless, persistence of government failures to address public good problems. Figure 4 depicts these 24