The tradeoff between inequality and growth (original) (raw)

Dismantling the myth of the growth-inequality trade-off

2019

Conventional economic wisdom has long maintained that there is a necessary trade-off between pursuit of the efficiency of a system and any attempts to improve equity between participants within that system. Economist Robert Lucas demonstrated the implications of this common economic axiom when he wrote: “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution [...] the potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.” (Lucas, 2004) Indeed, many economists have suggested that too little inequality or too generous a distribution of benefits may undermine the individual’s incentive to work hard and take risks. Setting aside the harsh rhetoric used by Lucas, the practical and ethical acceptability of such a trade-off is debatable. Moreover, evidenc...

Inequality and Growth in the Presence of Competition for Status

2006

For a long time there has been an active debate over the relationship between inequality and growth, fuelled further by more recent cross-country empirical studies ( [Forbes, 2000] and [Banerjee and Duflo, 2003] ). Aghion et al. (1999) (henceforth ACG) provide an excellent survey of the theoretical side of the argument, where there is little consensus either. They also discuss an important theoretical argument in favour of growth-enhancing redistribution.

Economic growth and the optimal inequality of income

Annales. Etyka w Życiu Gospodarczym

Inequality of income is one of the significant factors forming social capital. Two views dominate among economists dealing with the influence of income inequality on economic growth. On the one hand, a too low level of income inequality does not motivate people to increase their labour productivity. Low inequality of income might result from an extended social care system and a GDP burdened with social transfers. A good example may be a situation when an unemployed person refuses to accept a job offer and prefers unemployment benefits to a slightly higher salary. Moreover, a lack of incentives for an employee who fails to acknowledge the economic sense of increasing the productivity of his or her work might lead to a slower growth of the economy. On the other hand, a contrary view suggests that an increase in inequality of income has a negative impact on the economy. The accumulation of wealth by a small number of citizens raises doubts about the good use of that wealth for the inve...

Inequality and Growth Re-Examined

Technology and Investment, 2012

This paper examines the relationship between income inequality and subsequent economic growth. It builds on the model suggested by Alesina and Rodrik (1994) in which inequality works through greater demands for redistribution to slow down growth, and the idea by Ray (1998) that inequality negatively affects savings, work capacity, economic incentives, and access to and efficiency of credit and financial markets. Using an updated dataset and seven model variants, both OLS and 2SLS regressions find a strong negative effect of income inequality on future growth. The effect is considerably stronger for developing countries, but the existence or absence of democracy has no effect on either the relationship between inequality and growth or on the rate of growth itself. There is also no support for Barro's (2008) claim that inequality impacts growth positively in developed countries.

Inequality, Redistribution, and Economic Growth

SSRN Electronic Journal, 2000

This paper provides a critical review of the recent literature on inequality and growth. After discussing historical and more recent distributional trends as well as empirical evidence on the relationship between inequality and growth, I focus on recent explanations of the inequality-growth puzzle. I consider both the impact of the functional and the personal distribution on long-run growth rates. A final section discusses a rather neglected issue in the recent literature: the impact of expected demand for innovation decisions.

Income inequality and economic growth: A re‐examination of theory and evidence

2018

We re-examine the theoretical and empirical relationship between income inequality and economic growth in an endogenous growth model with a at tax on income, distributive conflicts among agents and median voter dynamics. We show that when government spends tax revenue on the provision of public goods in the form of both production and consumption services, the theoretical relationship between inequality and economic growth is neither strictly positive nor strictly negative but that it is ambiguous. An empirical evaluation of the theoretical findings is done by applying a semi-parametric model on a sample of 55 low-income, lower-middle-income, upper-middle-income and high-income countries for the period 1980 to 2010. Results show that the relationship between income inequality and growth takes the form of an inverted-U shape in that income inequality initially has a positive impact on growth up to an average Gini coefficient threshold of 35.92 beyond which it negatively impacts on gr...

Inequality and growth revisited

Trinity Economic Paper Series, 1999

In recent years, a vast literature on the links between inequality and growth has flourished. The emerging consensus is that equality enhances growth, but disagreement exists on the underlying mechanisms. In this paper, we aim to provide the reader with new empirical evidence ...

Income inequality and economic growth: a simple theoretical synthesis

2005

We show that in an AK model of endogenous growth with CRRA specifications for both private and public consumption goods, income inequality exerts theoretically ambiguous effects on the optimal capital tax rate and the economy's growth rate. In a calibrated version of the model, we find that the parameter space can be clearly divided into regions that exhibit a positive or negative relationship between income inequality and economic growth. Hence, our analysis provides a theoretical synthesis on the relationship between inequality and growth and helps bring together some recent results in the literature.

Three essays on the effect of domestic inequality and global inequality on economic growth

2021

2021 Spring.Includes bibliographical references.In the preface to his Principles of Political Economy and Taxation (1817; 1951, p. 5), David Ricardo wrote that the determination of laws of distribution is the principal problem in Political Economy. One of the political economy concerns (normative economics) is the application of economic policies to maintain specific goals based on observation or economic theory describing (positive economics). Ricardo's statement points to the importance of income distribution for economic growth and implies that understanding the relationship between income distribution and economic growth is crucial for policymakers. These three essays aim to contribute to the existing literature on the effects of domestic and global inequality in income distribution on growth. By developing a theoretical model, the first paper attempts to capture the effect of domestic inequality on economic growth in a closed economy without government. The main novelty is ...

Reassessing the Relationship between Economic Growth and Inequality

2011

This study attempts to reassess the relationship between economic growth and inequality using an up to date data set, 2003-2007, for a sample of seventy-four developed and developing countries. Average economic growth during this studied period is regressed against the 2003 values of inequality, growth, education, human development, inflation and governance quality using OLS cross-country models. The findings support a negative impact of inequality on economic growth for the entire sample. In particular, an increase (decrease) in inequality would lead to greater deterioration (expansion) in economic development in low-income countries than in high-and middle-income countries. Furthermore, improvement in governance does not either stimulate or hinder the economic growth.