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Explaining the Evidence on Inequality and Growth: Informality and Redistribution

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  • Davis Lewis S

    ()
    (Union College)

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    Abstract

    This paper constructs a simple model that can account for both the negative relationship between growth and income inequality observed in the cross-country data and the positive relationship observed within countries over time. The model employs a dual-economy structure with formal and informal sectors. Growth is driven by formal sector human capital spillovers. Restrictive institutions impose barriers to formality that reduce the growth rate and increase inequality. Redistributive taxation lowers inequality but blunts the incentive to accumulate, lowering growth. Institutional structures vary more across than within countries. Consequently, variations in institutional barriers to formality may account for the negative relationship between growth and inequality found in the cross-country data. Variations in the intensity of redistribution may account for the positive relationship observed within countries over time.

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    Bibliographic Info

    Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

    Volume (Year): 7 (2007)
    Issue (Month): 1 (January)
    Pages: 1-35

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    Handle: RePEc:bpj:bejmac:v:7:y:2007:i:1:n:7

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    Cited by:
    1. Dierk Herzer & Sebastian Vollmer, 2012. "Inequality and growth: evidence from panel cointegration," Journal of Economic Inequality, Springer, vol. 10(4), pages 489-503, December.
    2. Risso, W. Adrián & Punzo, Lionello F. & Carrera, Edgar J. Sánchez, 2013. "Economic growth and income distribution in Mexico: A cointegration exercise," Economic Modelling, Elsevier, vol. 35(C), pages 708-714.
    3. Monica Szeles, 2013. "Re-examining the relationship between economic growth and inequality in the New Member States," Quality & Quantity: International Journal of Methodology, Springer, vol. 47(5), pages 2799-2813, August.
    4. Charles-Coll, Jorge A., 2010. "The optimal rate of inequality: A framework for the relationship between income inequality and economic growth," MPRA Paper 28921, University Library of Munich, Germany.
    5. AMENDOLA, Adalgiso & DELL'ANNO, Roberto, 2013. "Social Exclusion and Economic Growth: An Empirical Investigation in European Economies," CELPE Discussion Papers 126, CELPE - Centre of Labour Economics and Economic Policy, University of Salerno, Italy.
    6. Jorge Alberto Charles Coll, 2014. "Inequality and growth in the context of the Mexican economy: Does inequality matter for growth?," Working Papers 331, ECINEQ, Society for the Study of Economic Inequality.

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