Violence, Wealth and Institutions: The Nature of and Road to the Market

This paper develops an industrial-organizational framework for understanding how violence shapes wealth and institutions. In the modeled Hobbesian society, parties acquire wealth via violence or the threat of it. Under certain conditions they can Pareto improve their welfare by creating a government for peace-keeping. With deep checks and balances built in, the system neutralizes violence in economic transactions paving the road to a market economy. The work explains the prime origin of power and power foundation of institutions. It predicts institutional diversity and instability and has strong policy implications for pressing domestic and international issues.