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The Tradeoff Between Inequality and Growth

  • Jess Benhabib

    ()

    (Department of Economics, New York University)

Is there a trade-off between inequality and economic growth? The theory and the evidence are so far inconclusive. So far the theory and the evidence are inconclusive. We want to construct a political economy model of growth to demonstrate that excessive inequality can disrupt the economy by inviting political interference through rent-seeking behavior and appropriation, but that policies supporting some modest inequality to take advantage of productivity differences can lead to the best growth rates. Thus we show that the relation between inequality and growth may be mildly hump-shaped: growth may rise modestly at first, as we move away from complete equality, and then drop again as inequality increases further.

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Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 4 (2003)
Issue (Month): 2 (November)
Pages: 491-507

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Handle: RePEc:cuf:journl:y:2003:v:4:i:2:p:491-507
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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. Levine, Ross & Renelt, David, 1991. "A sensitivity analysis of cross-country growth regressions," Policy Research Working Paper Series 609, The World Bank.
  3. Saint-Paul, G. & Verdier, T., 1991. "Education, Democracy and growth," DELTA Working Papers 91-27, DELTA (Ecole normale supérieure).
  4. Alesina, Alberto & Rodrik, Dani, 1994. "Distributive Politics and Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 465-90, May.
  5. Perotti, Roberto, 1996. " Growth, Income Distribution, and Democracy: What the Data Say," Journal of Economic Growth, Springer, vol. 1(2), pages 149-87, June.
  6. Sisay Asefa & Wei-Chiao Huang (ed.), 1994. "Human Capital and Economic Development," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number hced, June.
  7. Persson, T. & Tabellini, G., 1993. "Is Inequality Harmful for Growth," Papers 537, Stockholm - International Economic Studies.
  8. Kaitala, Veijo & Pohjola, Matti, 1990. "Economic Development and Agreeable Redistribution in Capitalism: Efficient Game Equilibria in a Two-Class Neoclassical Growth Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(2), pages 421-38, May.
  9. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-98, April.
  10. Islam, Nazrul, 1995. "Growth Empirics: A Panel Data Approach," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 1127-70, November.
  11. 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.
  12. Benhabib, Jess & Rustichini, Aldo, 1996. " Social Conflict and Growth," Journal of Economic Growth, Springer, vol. 1(1), pages 125-42, March.
  13. Benhabib, J. & Spiegel, M.M., 1992. "The Role of Human Capital and Political Instability in Economic Development," Working Papers 92-24, C.V. Starr Center for Applied Economics, New York University.
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