Crime induced poverty traps

A dynamic macroeconomic model is used to analyse the interaction between economic growth, unemployment and crime. The model exhibits increasing returns to aggregate capital due to endogenous crime. Capital investments increases the demand for labor and reduces the extent of criminal activity. Reduced criminal activity in turn increases the return on capital. As this linkage works via the aggregate labor demand the increasing return is external to the individual firm. Hence, the economy has possibly two equilibria: a) One where unemployment and crime rates are high and capital stock and income is low. and b) one where unemployment and crime rates are low and capital stock and income is high. Equilibrium a) has the characteristics of a poverty trap. The existence of a poverty trap has important implications for the speed of reform implementation. A too abrupt reform may throw the economy into a vicious circle of increasing crime and unempoyment