Which tail matters? Inequality and growth in Brazil

We estimate the effect of initial income inequality on subsequent income per capita growth using sub-national data from Brazil over the period 1970–2000. Holding initial income per capita and standard confounders constant, we find that sub-national units with a higher share of income going to the middle quintile at the expense of the bottom quintile grow more rapidly, while places with a higher share of income going to the top quintile at the expense of the middle quintile get no growth boost at all. We document that both physical and human capital accumulation in places with higher inequality in the lower tail of the initial income distribution outpace capital accumulation in more equal places, while inequality in the upper tail of the distribution is uncorrelated with subsequent physical or human capital growth. These results are consistent with theories on credit constraints and setup costs for human and physical capital investments.