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Growth and income inequality: a canonical model

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  • Cecilia García-Peñalosa

    ()

  • Stephen Turnovsky

Abstract

We develop an endogenous growth model with elastic labor supply, in which agents differ in their initial endowments of physical capital. In this framework, the growth rate and the distribution of income are jointly determined. The key equilibrating variable is the equilibrium labor supply. It determines the rate of return to capital, which in turn affects both the rate of capital accumulation and the distribution of income across agents. We then examine the impact of various structural shocks on growth and distribution. We find that faster growth is associated with a more unequal, contemporaneous distribution of income, consistent with recent empirical findings. Copyright Springer-Verlag Berlin/Heidelberg 2006

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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 28 (2006)
Issue (Month): 1 (05)
Pages: 25-49

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Handle: RePEc:spr:joecth:v:28:y:2006:i:1:p:25-49

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Keywords: Endogenous growth; Income inequality; Elastic labor supply.;

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  1. Cecilia Garcia-Penalosa & Eve Caroli & Philippe Aghion, 1999. "Inequality and Economic Growth: The Perspective of the New Growth Theories," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1615-1660, December.
  2. MaCurdy, Thomas E, 1981. "An Empirical Model of Labor Supply in a Life-Cycle Setting," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1059-85, December.
  3. Douglas Holtz-Eakin & David Joulfaian & Harvey S. Rosen, 1993. "The Carnegie Conjecture: Some Empirical Evidence," NBER Working Papers 4118, National Bureau of Economic Research, Inc.
  4. Turnovsky, Stephen J., 2000. "Fiscal policy, elastic labor supply, and endogenous growth," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 185-210, February.
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  13. Perotti, Roberto, 1996. " Growth, Income Distribution, and Democracy: What the Data Say," Journal of Economic Growth, Springer, vol. 1(2), pages 149-87, June.
  14. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  15. Ing-Haw Cheng & Eric French, 2000. "The effect of the run-up in the stock market on labor supply," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q IV, pages 48-65.
  16. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 825-853, August.
  17. Correia, Isabel H., 1999. "On the efficiency and equity trade-off," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 581-603, December.
  18. Barro, Robert J, 2000. " Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March.
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