When Lewis Encounters Marx - Endogenous Dualistic Structure Of Political Economy

Urban bias is a remarkable feature of developing economies. Existing theories of the dual economy rely on some exogenous distortions, and neglect the analysis of how dualism endogenously arises in political economic equilibrium, persists and evolves within the overall process of development. This paper provides a model of the dual economy in which the difference of the quality of club goods consumption and the amount of rural-urban migration are determined endogenously. An implication is that an agricultural productivity increase causes industrialization which accompanies the disappearance of the dual economy while manufacturing productivity increase would industrialize the economy with the differences between the sectors exacerbating. We incorporate the bargaining power of the rural people which could be characterized by the revolution constraint of the urban elites in a non-democracy society. In the game between urban elites and rural people, the tax rate is determined by a combination of the preferences of the elites and the constraints they face in equilibrium. The urban elites may have to deviate from their most preferred tax rate.