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Is Inequality Harmful for Growth? Theory and Evidence

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  • Torsten Persson and Guido Tabellini.

Abstract

Is inequality harmful for growth? We suggest that it is. In a society where distributional conflict is important, political decisions are likely to produce economic policies that allow private individuals to appropriate less of the returns to activities which promote growth, such as the accumulation of capital and productive knowledge. In this paper we 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 model's testable empirical implications with two sets of data. The first data set pools historical evidence - dating back to the mid-nineteenth 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, hetroscedasticity or other econometric problems.

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Bibliographic Info

Paper provided by University of California at Berkeley in its series Economics Working Papers with number 91-155.

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Date of creation: 01 Jan 1991
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Handle: RePEc:ucb:calbwp:91-155

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  1. Galor, Oded & Zeira, Joseph, 1988. "Income Distribution and Macroeconomics," MPRA Paper 51644, University Library of Munich, Germany, revised 01 Sep 1989.
  2. Roberts, Kevin W. S., 1977. "Voting over income tax schedules," Journal of Public Economics, Elsevier, vol. 8(3), pages 329-340, December.
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  10. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
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  14. 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).
  15. Romer, Thomas, 1975. "Individual welfare, majority voting, and the properties of a linear income tax," Journal of Public Economics, Elsevier, vol. 4(2), pages 163-185, February.
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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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