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Does Equality Promote Growth?

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  • Fölster , Stefan

    (Research Institute of Industrial Economics (IFN))

  • Trofimov, Georgi

    (Research Institute of Industrial Economics (IFN))

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    Abstract

    Several recent articles claim that pre-tax income equality promotes growth. Equality is argued to dampen demand for redistributive economic policies that tax returns to growth-enhancing activities such as investment. These results rest heavily on the assumption that pre-tax income equality is an exogenous parameter. We suggest that taking account of endogenous influences on pre-tax income equality changes both theoretical and empirical conclusions significantly. First, we extend previous theoretical models by letting income equality be endogenously determined. This leads to the conclusion that equality does not cause growth, although there may be a positive or negative correlation. Second, it is shown that previously reported positive empirical relationships between equality and growth turn insignificant or weakly negative when the omitted variables suggested by our model are taken into account.

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    File URL: http://www.ifn.se/wfiles/wp/wp461.pdf
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    Bibliographic Info

    Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 461.

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    Length: 42 pages
    Date of creation: May 1996
    Date of revision:
    Handle: RePEc:hhs:iuiwop:0461

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    Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden
    Phone: +46 8 665 4500
    Fax: +46 8 665 4599
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    Web page: http://www.ifn.se/
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    Related research

    Keywords: TAX POLICY; ECONOMIC GROWTH; INVESTMENTS;

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    References

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    1. Saint-Paul, G. & Verdier, T., 1991. "Education, Democracy and growth," DELTA Working Papers 91-27, DELTA (Ecole normale supérieure).
    2. Oded Galor & Joseph Zeira, 2013. "Income Distribution and Macroeconomics," Working Papers 2013-12, Brown University, Department of Economics.
    3. Bertola, Giuseppe, 1993. "Factor Shares and Savings in Endogenous Growth," American Economic Review, American Economic Association, vol. 83(5), pages 1184-98, December.
    4. Perotti, Roberto, 1994. "Income distribution and investment," European Economic Review, Elsevier, vol. 38(3-4), pages 827-835, April.
    5. Alberto Alesina & Roberto Perotti, 1993. "Income Distribution, Political Instability, and Investment," NBER Working Papers 4486, National Bureau of Economic Research, Inc.
    6. Lindbeck, Assar & Snower, Dennis J., 1995. "Restructuring Production and Work," CEPR Discussion Papers 1323, C.E.P.R. Discussion Papers.
    7. Jacob Mincer, 1989. "Human Capital Responses to Technological Change in the Labor Market," NBER Working Papers 3207, National Bureau of Economic Research, Inc.
    8. Aghion, Philippe & Bolton, Patrick, 1992. "Distribution and growth in models of imperfect capital markets," European Economic Review, Elsevier, vol. 36(2-3), pages 603-611, April.
    9. Jacob Mincer, 1991. "Human Capital, Technology, and the Wage Structure: What Do Time Series Show?," NBER Working Papers 3581, National Bureau of Economic Research, Inc.
    10. Perotti, Roberto, 1993. "Political Equilibrium, Income Distribution, and Growth," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 755-76, October.
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