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Inequality and Growth: Some Welfare Calculations

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  • Cordoba, Juan Carlos
  • Verdier, Genevieve

Abstract

The main lotteries individuals face during their lifetime are country and family of birth. How much consumption growth would a newborn sacrifice to avoid these lotteries? We find that he may be willing to sacrifice a large fraction, if not all, to avoid them. Critical elements for the results are time discounting and risk aversion. Both reduce the effect of growth on welfare while risk aversion increases the benefits of more equal outcomes. Another key factor is the staggering size of risk at birth. Our calculations suggest a research agenda that treats growth and inequality as priorities.

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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 32119.

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Date of creation: 16 Nov 2010
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Publication status: Published in Journal of Economic Dynamics and Control, June 2008, vol. 32 no. 6, pp. 1812-1829
Handle: RePEc:isu:genres:32119

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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References

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  1. Juan Carlos Cordoba & Geneviève Verdier, 2007. "Lucas vs. Lucas," IMF Working Papers 07/17, International Monetary Fund.
  2. Aaberge, Rolf & Björklund, Anders & Jäntti, Markus & Palme, Mårten & Pedersen, Peder & Smith, Nina & Wennemo, Tom, 1996. "Income Inequality and Income Mobility in the Scandinavian Countries Compared to the United States," Working Paper Series in Economics and Finance 98, Stockholm School of Economics, revised Aug 2002.
  3. repec:fth:harver:1435 is not listed on IDEAS
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  5. Dirk Kreuger & Fabrizio Perri, 2002. "Does Income Inequality Lead to Consumption Inequality? Evidence and Theory," Working Papers 02-15, New York University, Leonard N. Stern School of Business, Department of Economics.
  6. Xavier Sala-i-Martin, 2002. "The Disturbing "Rise" of Global Income Inequality," NBER Working Papers 8904, National Bureau of Economic Research, Inc.
  7. Steven N. Durlauf & Danny T. Quah, 1998. "The New Empirics of Economic Growth," NBER Working Papers 6422, National Bureau of Economic Research, Inc.
  8. TallariniJr., Thomas D., 2000. "Risk-sensitive real business cycles," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 507-532, June.
  9. Per Krusell & Anthony A. Smith, Jr., 1999. "On the Welfare Effects of Eliminating Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 245-272, January.
  10. Krüger, Dirk & Perri, Fabrizio, 2002. "Does Income Inequality Lead to Consumption Inequality?," CEPR Discussion Papers 3583, C.E.P.R. Discussion Papers.
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  12. Atkinson, Anthony B., 1970. "On the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 2(3), pages 244-263, September.
  13. Beaudry, Paul & van Wincoop, Eric, 1996. "The Intertemporal Elasticity of Substitution: An Exploration Using a US Panel of State Data," Economica, London School of Economics and Political Science, vol. 63(251), pages 495-512, August.
  14. Robert E. Lucas, Jr., 2004. "The Industrial Revolution: past and future," Annual Report, Federal Reserve Bank of Minneapolis, issue May, pages 5-20.
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  16. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  17. Biewen, Martin, 2000. "Income Inequality in Germany during the 1980s and 1990s," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 46(1), pages 1-19, March.
  18. Gadi Barlevy, 2005. "The cost of business cycles and the benefits of stabilization," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 32-49.
  19. Stephane Pallage & Michel A. Robe, 2003. "On the Welfare Cost of Economic Fluctuations in Developing Countries," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 677-698, 05.
  20. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  21. Michael C. Burda & Jennifer Hunt, 2001. "From Reunification to Economic Integration: Productivity and the Labor Market in Eastern Germany," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(2), pages 1-92.
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Cited by:
  1. Cordoba, Juan Carlos, 2012. "Children and the Wealth of Nations," Staff General Research Papers 34989, Iowa State University, Department of Economics.
  2. Cordoba, Juan Carlos, 2010. "US Inequality: Debt Constraints or Incomplete Asset Markets?," Staff General Research Papers 32120, Iowa State University, Department of Economics.
  3. Giacomo Corneo, 2011. "GINI DP 17: Income Inequality, Value Systems and Macroeconomic Performance," GINI Discussion Papers 17, AIAS, Amsterdam Institute for Advanced Labour Studies.
  4. repec:aia:ginidp:dp17 is not listed on IDEAS

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