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Explaining the Evidence on Inequality and Growth: Informality and Redistribution

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  • Davis Lewis S

    (Union College)

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.

Suggested Citation

  • Davis Lewis S, 2007. "Explaining the Evidence on Inequality and Growth: Informality and Redistribution," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-35, January.
    • Handle: RePEc:bpj:bejmac:v:7:y:2007:i:1:n:7
    DOI: 10.2202/1935-1690.1498
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    Cited by:

    1. Charles-Coll, Jorge & Mayer Granados, Elisabeth L., 2017. "How much Inequality is Harmful for Growth? The Growth Maximizing Rate of Inequality in the Context of the Mexican Economy," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 70(3), pages 301-318.
    2. Callais, Justin T. & Young, Andrew T., 2023. "A rising tide that lifts all boats: An analysis of economic freedom and inequality using matching methods," Journal of Comparative Economics, Elsevier, vol. 51(3), pages 744-777.
    3. Jorge Alberto Charles Coll & Elizabeth Lizeth Mayer Granados & Nazhle Faride Cheín Schekaiban, 2018. "Desigualdad en el ingreso y crecimiento económico de los municipios mexicanos: el efecto natalidad - capital humano\Income inequality and economic growth in Mexican municipalities: The fertility - hu," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 33(2), pages 195-217.
    4. 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.
    5. Vincent Leyaro, 2015. "Threshold and interaction effects in the trade, growth, and inequality relationship," WIDER Working Paper Series wp-2015-009, World Institute for Development Economic Research (UNU-WIDER).
    6. Jakub Bartak & Łukasz Jabłoński, 2020. "Inequality and growth: What comes from the different inequality measures?," Bulletin of Economic Research, Wiley Blackwell, vol. 72(2), pages 185-212, April.
    7. Bartak, Jakub & Jabłoński, Łukasz & Tomkiewicz, Jacek, 2022. "Does income inequality explain public debt change in OECD countries?," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 211-224.
    8. Roberto Dell'Anno & Adalgiso Amendola, 2015. "Social Exclusion and Economic Growth: An Empirical Investigation in European Economies," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 61(2), pages 274-301, June.
    9. Afonso, Oscar & Neves, Pedro Cunha & Pinto, Tiago, 2020. "The non-observed economy and economic growth: A meta-analysis," Economic Systems, Elsevier, vol. 44(1).
    10. 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.
    11. Dierk Herzer & Sebastian Vollmer, 2012. "Inequality and growth: evidence from panel cointegration," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 10(4), pages 489-503, December.
    12. Andrea Doneschi & Rossana Patrón, 2012. "Education and informality: what welfare effects are at stake?," Documentos de Trabajo (working papers) 0512, Department of Economics - dECON.
    13. Yohannes G. Hailu & Mulugeta S. Kahsai & Tesfa G. Gebremedhin & Randall W. Jackson, 2011. "Is Income Inequality Endogenous In Regional Growth?," Journal of Income Distribution, Ad libros publications inc., vol. 20(3-4), pages 43-56, September.
    14. 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.
    15. 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.
    16. Adalgiso Amendola & Roberto Dell�Anno, 2014. "Income inequality and economic growth: an empirical investigation in Mediterranean countries," RIEDS - Rivista Italiana di Economia, Demografia e Statistica - The Italian Journal of Economic, Demographic and Statistical Studies, SIEDS Societa' Italiana di Economia Demografia e Statistica, vol. 68(2), pages 35-58, April-Jun.
    17. Vincent Leyaro, 2015. "Threshold and interaction effects in the trade, growth, and inequality relationship," WIDER Working Paper Series 009, World Institute for Development Economic Research (UNU-WIDER).
    18. T. Tavor & L. D. Gonen & M. Weber & U. Spiegel, 2018. "The Effects of Income Levels and Income Inequalities on Happiness," Journal of Happiness Studies, Springer, vol. 19(7), pages 2115-2137, October.
    19. Ishmael Adams & Sumita Ghosh & Goran Runeson & Mahsood Shah, 2022. "Local Perceptions and Scientific Knowledge of Climate Change: Perspectives of Informal Dwellers and Institutions in Accra, Ghana," Sustainability, MDPI, vol. 14(9), pages 1-25, April.

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