Inequality affects economic performance through many mechanisms, both beneficial and harmful. Moreover, some of these mechanisms tend to set in fast while others are rather slow. The present paper (i) introduces a simple theoretical model to study how changes in inequality affect economic growth over different time horizons; (ii) empirically investigates the inequality-growth relationship, thereby relying on specifications derived from the theory. Our empirical findings are in line with the theoretical predictions: Higher inequality helps economic performance in the short term but reduces the growth rate of GDP per capita farther in the future. The long-run (or total) effect of higher inequality tends to be negative. The long-run (or total) e¤ect of higher inequality tends to be negative.JEL classi…cation: O11, O15, O43

Inequality affects economic performance through many mechanisms, both beneficial and harmful. Moreover, some of these mechanisms tend to set in fast while others are rather slow. The present paper (i) introduces a simple theoretical model to study how changes in inequality affect economic growth over different time horizons; (ii) empirically investigates the inequality-growth relationship, thereby relying on specifications derived from the theory. Our empirical findings are in line with the theoretical predictions: Higher inequality helps economic performance in the short term but reduces the growth rate of GDP per capita farther in the future. The long-run (or total) effect of higher inequality tends to be negative. The long-run (or total) e¤ect of higher inequality tends to be negative.JEL classi…cation: O11, O15, O43

It is often purported that unusually dry conditions provoke riots by intensifying the competition for water. The present paper explores this hypothesis, using data from Sub-Saharan Africa. We rely on monthly data at the cell level (0:5 0:5 degrees), an approach that is tailored to the fact that riots are short-lived and local events. Using a drought index to proxy for deviations of the actual climatic water balance from the normal one, we …nd that a one-standard-deviation fall in the index (signaling drier conditions) raises the likelihood of a riot in a given cell and month by 8.5 percent. We further observe that the e¤ect of unusual dryness is substantially larger in cells that combine a low supply of blue water with signi…cant agricultural activity, a …nding that supports the relevance of the water-competition mechanism.JEL classi…cation: D74, O13

Non-collusive corruption, i.e., corruption that imposes an additional burden on business activity, is particularly widespread in low-income countries. We build a macroeconomic model with credit market imperfections and heterogeneous agents to explore the roots and consequences of this type of corruption. We find that credit market imperfections, by generating rents for the incumbent entrepreneurs, create strong incentives for corrupt behavior by state officials. However, non-collusive corruption not only redistributes income from non-officials towards officials but also within the group of potential entrepreneurs. If borrowing is limited, bribes prevent poorer but talented individuals from starting a business. But this is likely to benefit those who may enter anyway; the cost of capital is lower and there is less competition on the goods markets.Who Gains from Non-Collusive Corruption?Reto Foellmi * and Manuel Oechslin † ‡ November 7, 2005Abstract Non-collusive corruption, i.e., corruption that imposes an additional burden on business activity, is particularly widespread in low-income countries. We build a macroeconomic model with credit market imperfections and heterogeneous agents to explore the roots and consequences of this type of corruption. We find that credit market imperfections, by generating rents for the incumbent entrepreneurs, create strong incentives for corrupt behavior by state officials. However, non-collusive corruption not only redistributes income from non-officials towards officials but also within the group of potential entrepreneurs.If borrowing is limited, bribes prevent poorer but talented individuals from starting a business. But this is likely to benefit those who may enter anyway; the cost of capital is lower and there is less competition on the goods markets.JEL classification: O11, D31, D73

a b s t r a c tGlobalization increasingly involves less-developed countries (LDCs), i.e., economies which usually suffer from severe imperfections in their financial systems. Taking these imperfections seriously, we analyze how credit frictions affect the distributive impact of trade liberalizations. We find that free trade significantly widens income differences among firm owners in LDCs: While wealthy entrepreneurs are better off, relatively poor business people lose. Intuitively, with integrated markets, profit margins shrink -which makes access to credit particularly difficult for the least-affluent agents. Richer entrepreneurs, by contrast, win because they can take advantage of new export opportunities. Our findings resonate well with a number of empirical regularities, in particular with the observation that some liberalizing LDCs have observed a surge in topincome shares.

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The lack of sustained growth in poor countries has often been attributed to ‘fiscal weakness’. Empirical evidence suggests that governments often fail to provide crucial public goods. I argue that this failure may be the result of a political instability effect: more resources fuel power struggles among competing elites – and decrease the incumbent regime's time horizon in office. But with a shorter time horizon, it is less attractive to finance growth‐promoting institutions whose returns only accrue in the future. The model further predicts the instability effect to be stronger in countries with little capital or in remote places which render technology adoption expensive.

This paper analyzes the impact of weak contracting institutions on economic development and the wealth distribution in a Ramsey-type growth model. We show that, at low levels of accumulation, weak contracting institutions strongly favor the economic elite: By preventing market entry, such institutions provide the "oligarchs" with cheap access to credit-which is highly beneficial as long as capital is scarce. At the same time, a broad crosssection of society faces only low returns so that capital accumulation is slowed down and the capital stock gets concentrated in the hands of the elite. At higher levels of development, however, weak contracting institutions are harmful to all segments of society and institutional reform becomes unanimously supported. So the model helps to explain the pervasiveness of weak contracting institutions in less-advanced economies.