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Innovations in democratic institutions and processes to boost citizen participation, enhance institutional legitimacy, and improve decisionmaking have been a long-lasting phenomenon since the inception of democracy. Recent participatory and deliberative research has focused on democratic innovations (DIs) meant for more informed decisionmaking and ease political polarization such as mini-publics, participatory budgeting, crowdsourced constitution-making, etcetera. The LATINNO database has documented more than three thousand DIs over more than one hundred years in Latin America – so far, the most comprehensive DIs database for a region and the world. LATINNO indicates that in the continent, particularly after the 1980s, DIs numbers increased substantially. However, the causes of that significant emergence are an open question. Coincidently, starting in the 1980s, the third wave of democratization and neoliberal economic reforms occurred in the region. Building upon research on the relationship between economic development and democracy, this paper argues that DIs are the political consequences of income distribution and state capacity, two inherent characteristics of the continent today, and its history as independent states. This paper draws on statistical methods to test that argument and focuses on the implications of income inequality and state capacity in the political competition between incumbent elites with “de jure” power and new elites with “de facto” power. This analysis explains the emergence of DIs in Latin America from two perspectives. First, contrary to intuitive theoretical expectations, income inequality affects positively and not negatively democratic and state institutions by incentivizing new elites to contest incumbent elites. Second, new elites see in the meager development of state capacity in Latin America opportunities to continue the consolidation of Latin American democracy projects. Both income inequality and developing state capacity make state and democracy institutions more participatory and deliberative.