Crime induced poverty traps

Poverty makes thieves and thieves hamper economic growth. We study these linkages in a model of modern sector job creation. Job creation has two effects. Higher labor demand tends to lower crime while higher output gives more to steal, tending to increase crime. At low levels of modernization the second effect dominates and, as a consequence, the model has decreasing returns to scale. At higher levels of modernization there is increasing returns to scale due to declining crime. The economy may end up in a poverty trap with high crime and low production or obtain full modernization with low crime rates. The danger of ending up in a poverty trap has implications for economic policies. We show, for instance, that a reform, intended to improve efficiency, may throw the economy into a vicious circle of increasing crime and stagnation if implemented too fast.