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Global Poverty Reduction And Pareto-Improving Redistribution

  • Chu, Angus C.

Can a transfer of wealth from the US to least developed countries be Pareto improving? We analyze this question in an open-economy innovation-driven growth model, in which the high-income (low-income) country produces innovative (homogenous) goods. We find that wealth redistribution to the low-income country simultaneously reduces global inequality and stimulates innovation through an increase in labor supply in the high-income country. Given that the market equilibrium of R&D-growth models is usually inefficient due to R&D externalities, the wealth redistribution may lead to a Pareto improvement, which occurs if the discount rate is sufficiently low or R&D productivity is sufficiently high.

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Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 16 (2012)
Issue (Month): 04 (September)
Pages: 605-624

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Handle: RePEc:cup:macdyn:v:16:y:2012:i:04:p:605-624_00
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