On Regional Inequality and Growth in India: Theory and Evidence
AbstractThis paper examines, both theoretically and empirically, how initial inequality affects economic growth with particular reference to the subnational states in India, for which no such evidence exists. The theoretical model is characterized by endogenous growth within an OLG set-up, where growth of the subnational economy is driven by productive public investment financed by a linear output tax, and the optimum tax is determined by the median voter rule. State-level data for the period 1960-94 from sixteen major subnational states in India are used to investigate the nature of the 'reverse causation'. Both single cross-section and pooled regression estimates suggest a negative relationship between initial inequality and growth: more initially unequal states need to have more redistributive measures as dictated by the majority voters which in turn creates distortionary effects and lower growth. However rural inequality seems to matter more than urban inequality.
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