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Explaining the Evidence on Inequality and Growth: Informality and Redistribution

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Author Info
Lewis S. Davis
Abstract

Please do note quote without permission of author. - This paper constructs a simple model that can account for both the negative relationship between growth and income inequality observed in the cross-country data and the positive relationship observed within countries over time. The model employs a dual-economy structure with formal and informal sectors. Growth is driven by formal sector human capital spillovers. Restrictive institutions impose barriers to formality that reduce the growth rate and increase inequality. Redistributive taxation lowers inequality but blunts the incentive to accumulate, lowering growth. Institutional structures vary more across than within countries. Consequently, variations in institutional barriers to formality may account for the negative relationship between growth and inequality found in the cross-country data. Variations in the intensity of redistribution may account for the positive relationship observed within countries over time.

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Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c009_032.

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Length: 38 pages
Date of creation: Jun 2004
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Handle: RePEc:deg:conpap:c009_032

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Related research
Keywords: Growth Inequality Dualism Informal Sector Institutions

Find related papers by JEL classification:
O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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