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Turbulent Growth and Inquality

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Author Info

  • Jones, R.
  • Newman, G.

Abstract

This paper develops a theory of income distribution in a growing economy from a search theoretic foundation. It focuses on a 'turbulent' growth process in which individual payoffs from ongoing advance hinge on search effort but are transient in the sense that each successive growth shock outdoes the informational advantage of previous winners. When agents' fortunes are realized in a sequence of growth states, basic results about the distribution of permanent income can be derived from the interplay of the negative effects of turbulence on search effort in each state and its positive effects on income mobility over states. No reference need be made to individual differences in initial circumstances, abilities to accumulate capital, or attitudes towards risk. The major result is that, for a population of (almost) identical agents, as the frequency of growth shocks is increased from zero, the variance of permanent income exhibits an inverted U shape. This implies that an increase in turbulence (from a low initial level) or a decrease in turbulence (from a high level) can both increase long-run equality. The framework also illustrates the deficiencies of both cross-sectional measures of dispersion and the traditional trade-off between growth and equity. In the case where growth leads to the 'democratization of poverty', uniformly high cross sectional variances can coexist with a low variance of permanent income, while mean incomes are falling.

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Bibliographic Info

Paper provided by Department of Economics, Simon Fraser University in its series Discussion Papers with number dp99-6.

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Length: 34 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:sfu:sfudps:dp99-6

Contact details of provider:
Postal: Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
Phone: (778)782-3508
Fax: (778)782-5944
Web page: http://www.sfu.ca/economics.html
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Order Information:
Postal: Working Paper Coordinator, Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
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Web: http://www.sfu.ca/economics/research/publications.html

Related research

Keywords: INCOME DISTRIBUTION ; ECONOMIC GROWTH;

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Cited by:
  1. Olsson, Ola & Hibbs, Douglas Jr., 2005. "Biogeography and long-run economic development," European Economic Review, Elsevier, vol. 49(4), pages 909-938, May.

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