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Inequality and aggregate savings in the neoclassical growth model

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Reto Foellmi

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Abstract

Within the context of the neoclassical growth model I investigate the implications of (initial) endowment inequality when the rich have a higher marginal savings rate than the poor. More unequal societies grow faster in the transition process, and therefore exhibit a higher speed of convergence. Furthermore, there is divergence in consumption and lifetime wealth if the rich exhibit a higher intertemporal elasticity of substitution. Unlike the Solow-Stiglitz model, the steady state is always unique although the consumption function is concave.

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Paper provided by Institute for Empirical Research in Economics - IEW in its series IEW - Working Papers with number iewwp395.

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Date of creation: Nov 2008
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Handle: RePEc:zur:iewwpx:395

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Related research
Keywords: Marginal propensity to consume; income distribution; growth; concave consumption function.;

Find related papers by JEL classification:
O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
D30 - Microeconomics - - Distribution - - - General
O10 - Economic Development, Technological Change, and Growth - - Economic Development - - - General

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  1. Bliss, Christopher, 2004. "Koopmans recursive preferences and income convergence," Journal of Economic Theory, Elsevier, vol. 117(1), pages 124-139, July. [Downloadable!] (restricted)
  2. Barro, Robert J, 2000. " Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March. [Downloadable!] (restricted)
  3. Smith, Douglas, 2001. "International evidence on how income inequality and credit market imperfections affect private saving rates," Journal of Development Economics, Elsevier, vol. 64(1), pages 103-127, February. [Downloadable!] (restricted)
  4. Sorger, Gerhard, 2002. "On the Long-Run Distribution of Capital in the Ramsey Model," Journal of Economic Theory, Elsevier, vol. 105(1), pages 226-243, July. [Downloadable!] (restricted)
  5. Stiglitz, Joseph E, 1969. "Distribution of Income and Wealth among Individuals," Econometrica, Econometric Society, vol. 37(3), pages 382-97, July. [Downloadable!] (restricted)
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  6. Schmidt-Hebbel, Klaus & Serven, Luis, 2000. "Does income inequality raise aggregate saving?," Journal of Development Economics, Elsevier, vol. 61(2), pages 417-446, April. [Downloadable!] (restricted)
  7. Lucas, Robert Jr. & Stokey, Nancy L., 1984. "Optimal growth with many consumers," Journal of Economic Theory, Elsevier, vol. 32(1), pages 139-171, February. [Downloadable!] (restricted)
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  8. Francesco Caselli & Jaume Ventura, 2000. "A Representative Consumer Theory of Distribution," American Economic Review, American Economic Association, vol. 90(4), pages 909-926, September. [Downloadable!] (restricted)
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  9. Cook, Christopher J, 1995. "Savings Rates and Income Distribution: Further Evidence from LDCs," Applied Economics, Taylor and Francis Journals, vol. 27(1), pages 71-82, January.
  10. Kristin J. Forbes, 2000. "A Reassessment of the Relationship between Inequality and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 869-887, September. [Downloadable!] (restricted)
  11. Chatterjee, Satyajit, 1994. "Transitional dynamics and the distribution of wealth in a neoclassical growth model," Journal of Public Economics, Elsevier, vol. 54(1), pages 97-119, May. [Downloadable!] (restricted)
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