Inequality, redistribution, and growth: new evidence on the trade-off between equality and efficiency

The past several decades have seen a significant and sustained increase in income inequality across many countries. Against this backdrop, some policymakers and economists are calling for distributive policies to address the rising inequality directly. Yet, there has been little systematic analysis of whether and how redistribution affects economic growth. To our knowledge, this is the first paper that systematically analyzes and presents evidence in a large panel of countries over 1965–2010 that redistribution can involve a non-trivial “trade-off” between equity and growth. Making it richer and more interesting, evidence also shows that the degree of trade-off between equity and growth tends to vary with the initial level of market income inequality and the size of redistribution itself. Extensive robustness checks confirm the results.