The injustice of inequality

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.

Political instability: Effects on financial development, roots in the severity of economic inequality

“…Also, current instability could be so severe that what would otherwise be satisfactory stabilizing institutions cannot contain the explosive instability. 17 Glaeser, Scheinkman and Shleifer (2003) model how severe inequality can degrade institutions, either because the wealthy degrade them for their own benefit to reduce the have-not's access to better institutions or because the have-nots, seeking to redistribute to themselves, degrade property institutions that protect the wealthy. Claessens and Perotti (2007) review similar channels.…”

Institutions, Finance and the Level of Development: the Impact on Entrepreneurship in Transition

“…New firm entry provides a churning effect to the economy, fosters development, innovation and economic change (Hirschman, 1958;Baumol, 1990;McMillan and Woodruff, 2002;Mickiewicz et al, 2005;Berkovitz and Jackson, 2006;Klapper et al, 2006). However, where institutions are weak entrepreneurs either do not undertake new projects or restrict their activities to unproductive ones, with a resulting loss of efficiency (Glaeser et al, 2003;Johnson et al, 1997;Baumol, 1990). Unfortunately, institutions are difficult to measure and unbundle.…”

Inequality, extractive institutions, and growth in nondemocratic regimes

“…In this sense, this study is related to those that analyze the relationship between inequality and institutions (Cervellati et al 2008, Engerman and Sokoloff 1997, Glaeser et al 2003, Gradstein 2007, Sokoloff and Engerman 2000, Sonin 2003. Our findings provide new insight into the effect of inequality.…”