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Income Inequality and Economic Growth: A Simple Theoretical Synthesis

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  • Been-Lon Chen

    (Institute of Economics, Academia Sinica)

  • Jang-Ting Guo

    (Department of Economics, University of California)

Abstract

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.

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Bibliographic Info

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

Volume (Year): 6 (2005)
Issue (Month): 2 (November)
Pages: 319-329

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Handle: RePEc:cuf:journl:y:2005:v:6:i:2:p:319-329

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Keywords: Income inequality; Economic growth; Optimal taxation;

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References

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  1. Hongyi Li & Lyn Squire & Tao Zhang & Heng-fu Zou, 1999. "A Data Set on Income Distribution," CEMA Working Papers, China Economics and Management Academy, Central University of Finance and Economics 575, China Economics and Management Academy, Central University of Finance and Economics.
  2. Cooley, T.F. & Hansen, G.D., 1991. "Tax Distortions in a Neoclassical Monetary Economy," RCER Working Papers, University of Rochester - Center for Economic Research (RCER) 265, University of Rochester - Center for Economic Research (RCER).
  3. Hongyi Li & Danyang Xie & Heng-fu Zou, 2002. "Dynamics of Income Distribution," GE, Growth, Math methods, EconWPA 0210001, EconWPA.
  4. Deininger, Klaus & Squire, Lyn, 1998. "New ways of looking at old issues: inequality and growth," Journal of Development Economics, Elsevier, Elsevier, vol. 57(2), pages 259-287.
  5. Abhijit V. Banerjee & Esther Duflo, 2000. "Inequality and Growth: What Can the Data Say?," NBER Working Papers 7793, National Bureau of Economic Research, Inc.
  6. Clarke, George R. G., 1992. "More evidence on income distribution and growth," Policy Research Working Paper Series, The World Bank 1064, The World Bank.
  7. Barro, Robert J, 2000. " Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, Springer, vol. 5(1), pages 5-32, March.
  8. Aghion, Philippe & Caroli, Eve & García-Peñalosa, Cecilia, 1999. "Inequality and Economic Growth: The Perspective of the New Growth Theories," Scholarly Articles 12502063, Harvard University Department of Economics.
  9. repec:fth:guelph:2000-2 is not listed on IDEAS
  10. Rodrik, Dani & Alesina, Alberto, 1994. "Distributive Politics and Economic Growth," Scholarly Articles 4551798, Harvard University Department of Economics.
  11. 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.
  12. Savvides, Andreas & Stengos, Thanasis, 2000. "Income inequality and economic development: evidence from the threshold regression model," Economics Letters, Elsevier, Elsevier, vol. 69(2), pages 207-212, November.
  13. Klaus Deininger & Lyn Squire, 1996. "A New Data Set Measuring Income Inequality," CEMA Working Papers, China Economics and Management Academy, Central University of Finance and Economics 512, China Economics and Management Academy, Central University of Finance and Economics.
  14. McGrattan, Ellen R & Rogerson, Richard & Wright, Randall, 1997. "An Equilibrium Model of the Business Cycle with Household Production and Fiscal Policy," 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. 38(2), pages 267-90, May.
  15. Hongyi Li & Lyn Squire & Heng-fu Zou, 1998. "Explaining International and Intertemporal Variations in Income Inequality," CEMA Working Papers, China Economics and Management Academy, Central University of Finance and Economics 73, China Economics and Management Academy, Central University of Finance and Economics.
  16. Chen, Been-Lon, 2003. "An inverted-U relationship between inequality and long-run growth," Economics Letters, Elsevier, Elsevier, vol. 78(2), pages 205-212, February.
  17. Hongyi Li & Heng-fu Zou, 1998. "Income Inequality Is Not Harmful for Growth: Theory and Evidence," CEMA Working Papers, China Economics and Management Academy, Central University of Finance and Economics 74, China Economics and Management Academy, Central University of Finance and Economics.
  18. 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.
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Cited by:
  1. Shu-Hua Chen, 2012. "On the Growth and Stability Effects of Habit Formation and Durability in Consumption," Annals of Economics and Finance, Society for AEF, Society for AEF, vol. 13(2), pages 283-298, November.
  2. Wang, Chan, 2012. "A very preliminary survey on growth and development," MPRA Paper 39037, University Library of Munich, Germany.

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