Poverty Traps, Economic Inequality and Incentives for Delinquency

Abstract

This paper explores theoretical linkages between poverty traps, economic inequality and delinquency in a perfect competition overlapping generations model characterized by dual legal production sectors and one illegal sector. The model posits an absence of credit for human capital accumulation, which generates barriers to skilled educational attainment. We find that the existence of a poverty trap under conditions of sufficient initial economic inequality and costly indivisible human capital investment generates persistent delinquency in the long run. We examine steady state changes caused by shocks that increase skilled wages or reduce land assets available to the unskilled, finding that these shocks produce outbursts of delinquency that die out later if the shocks are temporary but increases permanently otherwise. We also find that an increase on relative poverty has an ambiguous effect on long run delinquency rates while an increased focus on law enforcement policies, intended to increase deterrence and incapacitation, reduces delinquency in the long run and increases wealth inequality.

Keywords: poverty traps, inequality, delinquency, human capital

JEL Classification: I30, J31, K42, O11, O17