Inequality and institutional quality in a growth model

Abstract

By applying a growth model of an occupational choice between being a worker and being a criminal, an institutional Kuznets curve is produced. Using the Gini coefficient derived from the model, we investigate how institutional quality affects wealth inequality across agents. In the case of a relatively higher capital share, an institutional Kuznets curve can emerge. In this case, an improvement in institutional quality decreases the possibility of being stolen but increases the amount of wealth stolen. In the early stage of economic development, since the latter effect dominates the former, inequality widens as institutional quality improves. In contrast, since the converse is true in the late stage, inequality shrinks once institutions have sufficiently matured. In the case of a lower capital share, an institutional Kuznets curve cannot emerge. In this case, inequality monotonically shrinks as institutional quality improves. Furthermore, we present government policies that reduce inequality and achieve the first-best outcome.