Crime, inequality and Economic Growth

The idea that the level of criminal activity in a society is strictly related to the degree of economic development, and to the distribution of wealth among individuals and classes of individuals, is certainly not new, neither it is really counterintuitive. Despite this consideration, only very recently have economists started to study in complex macroeconomic models the channels of interaction between crime, the incentives to commit crime and economic development and growth. Indeed, in comparison to the wealth of microeconomic literature studying the optimal choice of agents in the presence of incentives to commit criminal offences and rent seeking behaviour (Glaeser, Sacerdote and Sheinkman, 1996; Fender, 1999; Burdet, Lagos and Randal, 2001; Huang, Laing and Wang, 1999; Lochner, 1999; Gould, Mustard and Weinberg, 2002 among others), the macroeconomic literature on the issue is very thin (Mehhulm, Moene and Torvik, 2001, 2003; Lloyd-Ellis and Marceau, 2003; Josten, 2003). However, only within a general equilibrium macroeconomic framework is it possible to fully grasp the extent to which the crime rate can affect the growth performance of an economic system. One can guess various possible links between the diffusion of criminal activities and economic growth. On the one hand, for example, a low level of economic development entails a higher degree of poverty and, to the extent that poverty is often a major cause of crime, a high level of criminal activity. Moreover, as empirical evidence shows, economic stagnation can further increase the crime rate if it increases inequality in income distribution. On the other hand, crime can negatively affect economic growth by affecting return on investments and business profitability. The idea is that a high diffusion of criminal offences, such as extortion, affects the riskiness of investments and the return on legal activities.