ABSTRACT
Introduction The growing literature linking economic growth and development to differential institutions has also spurred interest in the links between institutional arrangements and economic inequality. Unfortunately, distributional considerations do not fall out so easily from either the pure theories of economic growth or the theories regarding the institutional determinants of growth. Scholars now have good reason to believe that good institutions, such as sound property rights, marketpromoting regulations, strong contract enforcement, and stable legal rules, support high growth. But there is no guarantee that high economic growth will lead to a more even distribution of income. There is both theoretical work and empirical evidence following the initial observations of Simon Kuznets (1955) that in the early stages of growth, inequality may rise while further growth tends to lead to more even distributions of income in advanced economies (see Barro (2000) and Glaeser (2005) for recent surveys on this issue). However, there is also evidence that initial conditions of high inequality may result in distorted political and social institutions, which hinder both economic development as well as a more even distribution of material resources. In this chapter, I treat institutions generally in the sense of political and economic “rules of the game” in the formulation of Douglass North (1990), but, in keeping with the more complex determinants of inequality, also consider the role of initial conditions that might otherwise overlap with policy or social conditions.
