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Is Inequality Harmful for Growth? Theory and Evidence

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  • Torsten Persson
  • Guido Tabellini

Abstract

Is inequality harmful for growth? We suggest that it is. To summarize our main argument: in a society where distributional conflict is more important, political decisions are more likely to produce economic policies that allow private individuals to appropriate less of the returns to growth promoting activities, such as accumulation of capital and productive knowledge. In the paper we first formulate a theoretical model that formally captures this idea. The model has a politico-economic equilibrium, which determines a sequence of growth rates depending on structural parameters, political institutions, and initial conditions. We then confront the testable empirical implications with two sets of data. A first data set pools historical evidence-which goes back to the mid 19th century-from the US and eight European countries. A second data set contains post-war evidence from a broad cross-section of developed and less developed countries. In both samples we find a statistically significant and quantitatively important negative relation between inequality and growth. After a comprehensive sensitivity analysis, we conclude that our findings are not distorted by measurement error, reverse causation, hetroskedasticity, or other econometric problems.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3599.

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Date of creation: Jan 1991
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Publication status: published as American Economic Review, Vol. 84 (1994): 600-621.
Handle: RePEc:nbr:nberwo:3599

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  1. Lindert, Peter H. & Williamson, Jeffrey G., 1985. "Growth, equality, and history," Explorations in Economic History, Elsevier, Elsevier, vol. 22(4), pages 341-377, October.
  2. Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(5), pages 1076-1107, October.
  3. Roberts, Kevin W. S., 1977. "Voting over income tax schedules," Journal of Public Economics, Elsevier, Elsevier, vol. 8(3), pages 329-340, December.
  4. Alberto Alesina & Dani Rodrik, 1991. "Distributive Politics and Economic Growth," NBER Working Papers 3668, National Bureau of Economic Research, Inc.
  5. Klepper, Steven & Leamer, Edward E, 1984. "Consistent Sets of Estimates for Regressions with Errors in All Variables," Econometrica, Econometric Society, Econometric Society, vol. 52(1), pages 163-83, January.
  6. Romer, Thomas, 1975. "Individual welfare, majority voting, and the properties of a linear income tax," Journal of Public Economics, Elsevier, Elsevier, vol. 4(2), pages 163-185, February.
  7. Oded Galor & Joseph Zeira, 2013. "Income Distribution and Macroeconomics," Working Papers 2013-12, Brown University, Department of Economics.
  8. Barro, Robert J. & Sala-i-Martin, Xavier, 1992. "Public Finance in Models of Economic Growth," CEPR Discussion Papers, C.E.P.R. Discussion Papers 630, C.E.P.R. Discussion Papers.
  9. Barro, R.J., 1989. "Economic Growth In A Cross Section Of Countries," RCER Working Papers 201, University of Rochester - Center for Economic Research (RCER).
  10. Terrones, M., 1990. "Influence Activities And Economic Growth," UWO Department of Economics Working Papers, University of Western Ontario, Department of Economics 9006, University of Western Ontario, Department of Economics.
  11. Romer, Paul M, 1987. "Growth Based on Increasing Returns Due to Specialization," American Economic Review, American Economic Association, American Economic Association, vol. 77(2), pages 56-62, May.
  12. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, Econometric Society, vol. 48(4), pages 817-38, May.
  13. Sergio T. Rebelo, 1990. "Long Run Policy Analysis and Long Run Growth," NBER Working Papers 3325, National Bureau of Economic Research, Inc.
  14. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  15. Summers, Robert & Heston, Alan, 1988. "A New Set of International Comparisons of Real Product and Price Levels Estimates for 130 Countries, 1950-1985," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 34(1), pages 1-25, March.
  16. Alesina, Alberto & Tabellini, Guido, 1988. "Credibility and politics," European Economic Review, Elsevier, Elsevier, vol. 32(2-3), pages 542-550, March.
  17. Grandmont, Jean-Michel, 1978. "Intermediate Preferences and the Majority Rule," Econometrica, Econometric Society, Econometric Society, vol. 46(2), pages 317-30, March.
  18. Romer, P.M., 1988. "Capital Accumulation In The Theory Of Long Run Growth," RCER Working Papers 123, University of Rochester - Center for Economic Research (RCER).
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  1. Globalization, equality and liberty
    by chris dillow in Stumbling and Mumbling on 2005-11-10 16:15:02
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