Learn, sweat or steal: a theory of development and the activity of children

I explore the effects credit market imperfections and institutional quality -security of property rights and quality of education- have on the joint distribution of schooling, child labor and child crime in developing countries. To that end, I develop and analyze an overlapping generations model of endogenous growth and inequality in the distribution of human capital. In this context, I argue that banning child labor permanently in countries with poor institutions unambiguously harms the working children living in the poorest households. The insight is that the poor institutional quality leads the poorest households to face a tradeoff for their child´s activities not between work and school, but between work and crime. Accordingly, the ban leads those children into crime. In turn, once these children are adults, their own children will be involved into crime, and so on, negatively affecting everyone in the long run. Furthermore, even a temporary ban on child labor can have a permanent negative effect on everyone´s welfare if the quality of education is sufficiently poor. Finally, I argue that investing on the institutional quality of the economy benefits all generations of children if this investment is financed by those households with the largest levels of income.