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

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Author Info
Christophe Ehrhart () (CRESS-Lessor, Université Rennes 2 - Haute Bretagne)
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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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
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Handle: RePEc:inq:inqwps:ecineq2009-107

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Keywords: Inequality; Growth;

Find related papers by JEL classification:
O15 - Economic Development, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gustavo A. Marrero & Juan G. Rodríguez, 2009. "Inequality of Opportunity and Growth," Working Papers 2009-24, FEDEA. [Downloadable!]
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