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The Tradeoff Between Inequality and Growth

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  • Jess Benhabib

    ()
    (Department of Economics, New York University)

Abstract

Is there a trade-off between inequality and economic growth? The theory and the evidence are so far inconclusive. So far the theory and the evidence are inconclusive. We want to construct a political economy model of growth to demonstrate that excessive inequality can disrupt the economy by inviting political interference through rent-seeking behavior and appropriation, but that policies supporting some modest inequality to take advantage of productivity differences can lead to the best growth rates. Thus we show that the relation between inequality and growth may be mildly hump-shaped: growth may rise modestly at first, as we move away from complete equality, and then drop again as inequality increases further.

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Bibliographic Info

Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 4 (2003)
Issue (Month): 2 (November)
Pages: 491-507

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Handle: RePEc:cuf:journl:y:2003:v:4:i:2:p:491-507

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Related research

Keywords: Politics; Inequality; Growth; Conflict; Distribution;

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References

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  1. Kaitala, Veijo & Pohjola, Matti, 1990. "Economic Development and Agreeable Redistribution in Capitalism: Efficient Game Equilibria in a Two-Class Neoclassical Growth Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(2), pages 421-38, May.
  2. Rodrik, Dani & Alesina, Alberto, 1994. "Distributive Politics and Economic Growth," Scholarly Articles 4551798, Harvard University Department of Economics.
  3. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, American Economic Association, vol. 84(3), pages 600-621, June.
  4. Levine, Ross & Renelt, David, 1992. "A Sensitivity Analysis of Cross-Country Growth Regressions," American Economic Review, American Economic Association, American Economic Association, vol. 82(4), pages 942-63, September.
  5. Oded Galor & Joseph Zeira, 2013. "Income Distribution and Macroeconomics," Working Papers, Brown University, Department of Economics 2013-12, Brown University, Department of Economics.
  6. Islam, Nazrul, 1995. "Growth Empirics: A Panel Data Approach," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 110(4), pages 1127-70, November.
  7. Sisay Asefa & Wei-Chiao Huang (ed.), 1994. "Human Capital and Economic Development," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, W.E. Upjohn Institute for Employment Research, number hced.
  8. Perotti, Roberto, 1996. " Growth, Income Distribution, and Democracy: What the Data Say," Journal of Economic Growth, Springer, Springer, vol. 1(2), pages 149-87, June.
  9. Saint-Paul, G. & Verdier, T., 1991. "Education, Democracy and growth," DELTA Working Papers, DELTA (Ecole normale supérieure) 91-27, DELTA (Ecole normale supérieure).
  10. Kristin J. Forbes, 2000. "A Reassessment of the Relationship between Inequality and Growth," American Economic Review, American Economic Association, American Economic Association, vol. 90(4), pages 869-887, September.
  11. Benhabib, Jess & Rustichini, Aldo, 1996. " Social Conflict and Growth," Journal of Economic Growth, Springer, Springer, vol. 1(1), pages 125-42, March.
  12. Benhabib, J. & Spiegel, M.M., 1992. "The Role of Human Capital and Political Instability in Economic Development," Working Papers, C.V. Starr Center for Applied Economics, New York University 92-24, C.V. Starr Center for Applied Economics, New York University.
  13. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(2), pages 274-98, April.
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Cited by:
  1. Wang, Chan, 2012. "A very preliminary survey on growth and development," MPRA Paper 39037, University Library of Munich, Germany.
  2. Heather Boushey & Christian E. Weller, 2006. "Inequality and Household Economic Hardship in the United States of America," Working Papers, United Nations, Department of Economics and Social Affairs 18, United Nations, Department of Economics and Social Affairs.

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