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The effects of inequality on growth: a survey of the theoretical and empirical literature

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  • Christophe Ehrhart

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    (CRESS-Lessor, Université Rennes 2 - Haute Bretagne)

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    Abstract

    Basically, the extensive theoretical and empirical literature on the interactions between growth/development and distribution can be divided into two main approaches. The first one examines the impact of economic development on income distribution in a long run perspective. The second one focuses on the inverse causality between inequality and growth. This paper aims at reviewing this second view about the effects of initial inequality of income and wealth on future growth rate. The theoretical literature suggests several channels through which inequality might be harmful for growth, namely three economic explanations (the channel of the capital market imperfections, the approach of endogenous fertility, the argument relating to the domestic market size) and two politico-economic arguments (the approach of endogenous fiscal policy and the political instability channel). The following conclusions can be drawn from our survey of the empirical studies regarding the relationship between inequality and growth: first, only the endogenous fertility approach and the explanation based on political instability receive convincing support from the data. Second, initial inequality of assets has a negative and significant effect on subsequent growth. As a result, wealth redistribution is likely to enhance future growth.

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    File URL: http://www.ecineq.org/milano/WP/ECINEQ2009-107.pdf
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    Paper provided by ECINEQ, Society for the Study of Economic Inequality in its series Working Papers with number 107.

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    Length: 50 pages
    Date of creation: 2009
    Date of revision:
    Handle: RePEc:inq:inqwps:ecineq2009-107

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    Keywords: Inequality; Growth;

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    Cited by:
    1. Gustavo A. Marrero & Juan G. Rodríguez, 2009. "Inequality of Opportunity and Growth," Working Papers 2009-24, FEDEA.
    2. Karen Davtyan, 2014. "“Interrelation among Economic Growth, Income Inequality, and Fiscal Performance: Evidence from Anglo-Saxon Countries”," IREA Working Papers 201405, University of Barcelona, Research Institute of Applied Economics, revised Feb 2014.
    3. João Gabriel Fidalgo & Marta Simões & Adelaide Duarte, 2010. "Mind the Gap: Education Inequality at the Regional Level in Portugal, 1986-2005," Notas Económicas, Faculdade de Economia, Universidade de Coimbra, issue 32, pages 22-43, December.
    4. Geoffrey Teyssier, 2013. "Inequality, inequality of opportunity, and growth: what are we talking about? Theory and empirical investigation in Brazil," Post-Print dumas-00906310, HAL.

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