Reconsidering the modernization hypothesis: The role of diversified production and interest-group competition

The modernization hypothesis attributes democracy to higher incomes. The hypothesis has been controversial with claims of no relationship or opposite causality. Using data on a large sample of countries over the period from 1995 to 2015, we show empirically that the hypothesis is valid by studying the role of diversified production and interest-group competition. Production diversification increases incomes and is associated with emergence of competing organized interest groups representing the different diversified sectors. The interest-group competition underlies democracy by restraining rent seeking for benefits that would otherwise be sought through single-decision-maker authoritarian government.