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Income inequality and economic growth

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  • Shin, Inyong

Abstract

Despite the extensive existing literature on income inequality and economic growth, there remains considerable disagreement on the effect of inequality on economic growth. Existing literatures find either a positive or a negative relationship. In this paper, we attempt to theoretically examine that relationship with a stochastic optimal growth model. We make the disagreement clear within a single model. We conclude (i) that both are possible – that is, higher inequality can retard growth in the early stage of economic development, and can encourage growth in a near steady state, (ii) that income redistribution by high income tax does not always reduce income inequality. Income inequality can be reduced by higher income tax in a near steady state, but it cannot be reduced in the early stage of economic development, and (iii) that two government polices – rapid economic growth and low income inequality – can be achieved by low income tax in the early stage of economic development, but both cannot be achieved simultaneously in a near steady state.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 29 (2012)
Issue (Month): 5 ()
Pages: 2049-2057

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Handle: RePEc:eee:ecmode:v:29:y:2012:i:5:p:2049-2057

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Web page: http://www.elsevier.com/locate/inca/30411

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Keywords: Income inequality; Economic growth; Progressive tax; Transition dynamics; Asset distribution;

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Cited by:
  1. Michel Dumont & Nikolina Stojanovska & Ludo Cuyvers, 2011. "World inequality, globalisation, technology and labour market institutions," International Journal of Manpower, Emerald Group Publishing, vol. 32(3), pages 257-272, July.
  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.

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