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Why progressive redistribution can hurt the poor

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  • Foellmi, Reto
  • Oechslin, Manuel

Abstract

Recent macroeconomic research discusses credit market imperfections as a key channel through which inequality retards growth: With convex technologies, progressive transfers increase aggregate output because marginal returns become more equalized across investment opportunities. We argue that this reasoning may not hold in general equilibrium. Since the investment functions are concave in wealth, reducing inequality increases capital demand and the interest rate. Hence, through the impact on capital costs, shifting wealth from the rich to the middle class depletes the poorest investors' access to credit. But because the poor face the highest marginal returns, the net effect on output may be negative. We find, however, that redistributing towards the bottom-end of the distribution has a clear positive impact. Finally, we discuss the implications of our theoretical findings for future empirical research.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 92 (2008)
Issue (Month): 3-4 (April)
Pages: 738-747

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Handle: RePEc:eee:pubeco:v:92:y:2008:i:3-4:p:738-747

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Web page: http://www.elsevier.com/locate/inca/505578

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  1. Thomas Piketty, 1992. "Imperfect Capital Markets and Persistence of Initial Wealth Inequalities," STICERD - Theoretical Economics Paper Series /1992/255, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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  5. Kiminori Matsuyama, 1998. "Endogenous Inequality," Discussion Papers 1238, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Barro, Robert J, 2000. " Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March.
  7. Genicot, Garance & Ray, Debraj, 2006. "Bargaining power and enforcement in credit markets," Journal of Development Economics, Elsevier, vol. 79(2), pages 398-412, April.
  8. Abhijit V. Banerjee & Esther Duflo, 2000. "Inequality and Growth: What Can the Data Say?," NBER Working Papers 7793, National Bureau of Economic Research, Inc.
  9. Patrick Legros & Andrew Newman, 1996. "Wealth effects, distribution, and the theory of organization," ULB Institutional Repository 2013/7036, ULB -- Universite Libre de Bruxelles.
  10. Sarah Voitchovsky, 2005. "Does the Profile of Income Inequality Matter for Economic Growth?," Journal of Economic Growth, Springer, vol. 10(3), pages 273-296, 09.
  11. Perotti, Roberto, 1996. " Growth, Income Distribution, and Democracy: What the Data Say," Journal of Economic Growth, Springer, vol. 1(2), pages 149-87, June.
  12. Piketty, Thomas, 1997. "The Dynamics of the Wealth Distribution and the Interest Rate with Credit Rationing," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 173-89, April.
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Cited by:
  1. Foellmi, Reto & Oechslin, Manuel, 2009. "Market Imperfections, Wealth Inequality, and the Distribution of Trade Gains," CEPR Discussion Papers 7520, C.E.P.R. Discussion Papers.
  2. Daniel Halter & Manuel Oechslin & Josef Zweim├╝ller, 2010. "Inequality and growth: the neglected time dimension," IEW - Working Papers 507, Institute for Empirical Research in Economics - University of Zurich, revised Nov 2011.
  3. Loayza, Norman & Rigolini, Jamele & Llorente, Gonzalo, 2012. "Do middle classes bring about institutional reforms?," Economics Letters, Elsevier, vol. 116(3), pages 440-444.
  4. Loayza, Norman & Rigolini, Jamele & Llorente, Gonzalo, 2012. "Do Middle Classes Bring Institutional Reforms?," IZA Discussion Papers 6430, Institute for the Study of Labor (IZA).
  5. Daniel Halter & Manuel Oechslin & Josef Zweim├╝ller, 2014. "Inequality and growth: the neglected time dimension," Journal of Economic Growth, Springer, vol. 19(1), pages 81-104, March.

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