The Injustice of Inequality

The Injustice of Inequality - The Injustice of Inequality...

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The Injustice of Inequality Edward Glaeser, *a Jose Scheinkman, b and Andrei Shleifer c *a Department of Economics, Harvard University, Cambridge, MA, 02138, USA b Bendheim Finance Center, Princeton University, Princeton, NJ 08544, USA c Department of Economics, Harvard University, Cambridge, MA, 02138, USA October 20, 2001, Revised, July 29, 2002 Abstract In many countries, the operation of legal, political and regulatory institutions is subverted by the wealthy and the politically powerful for their own benefit. This subversion takes the form of corruption, intimidation, and other forms of influence. We present a model of such institutional subversion – focusing specifically on courts – and of the effects of inequality in economic and political resources on the magnitude of subversion. We then use the model to analyze the consequences of institutional subversion for the law and order environment in the country, as well as for capital accumulation and growth. We illustrate the model with historical evidence from Gilded Age United States and the transition economies of the 1990s. We also present some cross-country evidence consistent with the basic prediction of the model. Key Words: Inequality, Growth, Subversion of institutions JEL Classification: K40, K42, O17, 040, P51 *Corresponding Author: Professor Edward L. Glaeser, Department of Economics, Harvard University, Cambridge, MA 02138; Telephone: 617-495-0575; Fax: 617-495-7730; E-mail: [email protected] We are grateful to Raquel Fernandez, Rafael La Porta, Florencio Lopez-de-Silanes, and Larry Summers for helpful comments, to Jesse Shapiro and Andrei Goureev for excellent research assistance, and to the National Science Foundation for research support.
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1 I. Introduction Recent evidence from a cross-section of countries suggests that economic inequality is related to a variety of adverse social and economic outcomes. Alesina and Rodrik (1994) and Persson and Tabellini (1994) show that inequality reduces economic growth, especially in democracies. Barro (1996) concurs but argues that this is only true in poor countries. Waldmann (1992) identifies adverse consequences of inequality for infant mortality. Fajnzylber, Lederman, and Lloayza (2002) show that countries with higher inequality suffer from more violent crime. These results are generally robust to controls for the absolute level of poverty. In this paper, we propose a new mechanism by which inequality shapes economic and social outcomes: subversion of institutions. 1 Since Montesquieu (1748) and Smith (1776), economists agree that good economic institutions must secure private property against expropriation – by both the neighbors and the state. Such security encourages individuals to invest in physical capital, and so fosters economic growth. Countries with good institutions grow and prosper, countries without them – stagnate. Indeed, recent evidence (Barro 1991, DeLong and Shleifer 1993, and Knack and Keefer 1995) strongly corroborates the proposition that institutions effectively securing property rights are conducive to economic growth.
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This note was uploaded on 04/05/2011 for the course ECO 365 taught by Professor Giederman during the Winter '11 term at Grand Valley State.

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The Injustice of Inequality - The Injustice of Inequality...

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