Income inequality and economic growth
Despite the extensive existing literature on income inequality and economic growth, there remains considerable disagreement on the effect of inequality on economic growth. Existing literatures find either a positive or a negative relationship. In this paper, we attempt to theoretically examine that relationship with a stochastic optimal growth model. We make the disagreement clear within a single model. We conclude (i) that both are possible – that is, higher inequality can retard growth in the early stage of economic development, and can encourage growth in a near steady state, (ii) that income redistribution by high income tax does not always reduce income inequality. Income inequality can be reduced by higher income tax in a near steady state, but it cannot be reduced in the early stage of economic development, and (iii) that two government polices – rapid economic growth and low income inequality – can be achieved by low income tax in the early stage of economic development, but both cannot be achieved simultaneously in a near steady state.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Acemoglu, Daron, 1996.
"Matching, Heterogeneity and the Evolution of Income Distribution,"
CEPR Discussion Papers
1345, C.E.P.R. Discussion Papers.
- Acemoglu, Daron, 1997. " Matching, Heterogeneity, and the Evolution of Income Distribution," Journal of Economic Growth, Springer, vol. 2(1), pages 61-92, March.
- Daron Acemoglu, 1995. "Matching, Heterogeneity and the Evolution of Income Distribution," Working papers 95-25, Massachusetts Institute of Technology (MIT), Department of Economics.
- N. Gregory Mankiw & David Romer & David N. Weil, 1990.
"A Contribution to the Empirics of Economic Growth,"
NBER Working Papers
3541, National Bureau of Economic Research, Inc.
- Hongyi Li & Heng-fu Zou, 1998.
"Income Inequality Is Not Harmful for Growth: Theory and Evidence,"
CEMA Working Papers
74, China Economics and Management Academy, Central University of Finance and Economics.
- Li, Hongyi & Zou, Heng-fu, 1998. "Income Inequality Is Not Harmful for Growth: Theory and Evidence," Review of Development Economics, Wiley Blackwell, vol. 2(3), pages 318-34, October.
- Per Krusell & Anthony A. Smith, Jr., .
"Income and Wealth Heterogeneity in the Macroeconomy,"
GSIA Working Papers
1997-37, Carnegie Mellon University, Tepper School of Business.
- Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October.
- Krusell, P & Smith Jr, A-A, 1995. "Income and Wealth Heterogeneity in the Macroeconomic," RCER Working Papers 399, University of Rochester - Center for Economic Research (RCER).
- Alberto Alesina & Dani Rodrik, 1991.
"Distributive Politics and Economic Growth,"
NBER Working Papers
3668, National Bureau of Economic Research, Inc.
- Wolfson, Michael C, 1994. "When Inequalities Diverge," American Economic Review, American Economic Association, vol. 84(2), pages 353-58, May.
- Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, June.
- Benabou, R., 1996.
"Inequality and Growth,"
96-22, C.V. Starr Center for Applied Economics, New York University.
- Perotti, Roberto, 1993. "Political Equilibrium, Income Distribution, and Growth," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 755-76, October.
- Perotti, Roberto & Alesina, Alberto, 1996. "Income Distribution, Political Instability, and Investment," Scholarly Articles 4553018, Harvard University Department of Economics.
- Bourguignon, Francois, 1990. "Growth and Inequality in the Dual Model of Development: The Role of Demand Factors," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 215-28, April.
- Chen, Been-Lon, 2003. "An inverted-U relationship between inequality and long-run growth," Economics Letters, Elsevier, vol. 78(2), pages 205-212, February.
- Perotti, Roberto, 1996. " Growth, Income Distribution, and Democracy: What the Data Say," Journal of Economic Growth, Springer, vol. 1(2), pages 149-87, June.
- Castaneda, Ana & Diaz-Gimenez, Javier & Rios-Rull, Jose-Victor, 1998. "Exploring the income distribution business cycle dynamics," Journal of Monetary Economics, Elsevier, vol. 42(1), pages 93-130, June.
- Sukiassyan, Grigor, 2007. "Inequality and growth: What does the transition economy data say?," Journal of Comparative Economics, Elsevier, vol. 35(1), pages 35-56, March.
- Persson, T. & Tabellini, G., 1993.
"Is Inequality Harmful for Growth,"
537, Stockholm - International Economic Studies.
- Murphy, Kevin M & Shleifer, Andrei & Vishny, Robert W, 1989.
"Income Distribution, Market Size, and Industrialization,"
The Quarterly Journal of Economics,
MIT Press, vol. 104(3), pages 537-64, August.
- Kevin M. Murphy & Andrei Shleifer & Robert Vishny, 1988. "Income Distribution, Market Size, and Industrialization," NBER Working Papers 2709, National Bureau of Economic Research, Inc.
- Alesina, Alberto & Perotti, Roberto, 1996.
"Income distribution, political instability, and investment,"
European Economic Review,
Elsevier, vol. 40(6), pages 1203-1228, June.
- Alberto Alesina & Roberto Perotti, 1993. "Income Distribution, Political Instability, and Investment," NBER Working Papers 4486, National Bureau of Economic Research, Inc.
- De Long, J Bradford, 1988.
"Productivity Growth, Convergence, and Welfare: Comment,"
American Economic Review,
American Economic Association, vol. 78(5), pages 1138-54, December.
- J. Bradford De Long, . "Productivity Growth, Convergence, and Welfare: Comment," J. Bradford De Long's Working Papers _129, University of California at Berkeley, Economics Department.
- Marimon, Ramon & Scott, Andrew (ed.), 1999. "Computational Methods for the Study of Dynamic Economies," OUP Catalogue, Oxford University Press, number 9780198294979, March.
- Abramovitz, Moses, 1986. "Catching Up, Forging Ahead, and Falling Behind," The Journal of Economic History, Cambridge University Press, vol. 46(02), pages 385-406, June.
- Toshiaki Tachibanaki, 2005. "Confronting Income Inequality in Japan: A Comparative Analysis of Causes, Consequences, and Reform," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262201585, June.
- 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.
- Baumol, William J, 1986. "Productivity Growth, Convergence, and Welfare: What the Long-run Data Show," American Economic Review, American Economic Association, vol. 76(5), pages 1072-85, December.
- Abhijit V. Banerjee & Esther Duflo, 2000.
"Inequality and Growth: What Can the Data Say?,"
NBER Working Papers
7793, National Bureau of Economic Research, Inc.
- Shin, Inyong & Kim, Hyunho & Yamamura, Eiji, 2008. "Technological Progress and the Future of Kuznets Curve's," MPRA Paper 18866, University Library of Munich, Germany.
- Amos, Orley Jr., 1988. "Unbalanced regional growth and regional income inequality in the latter stages of development," Regional Science and Urban Economics, Elsevier, vol. 18(4), pages 549-566, November.
- Barro, Robert J, 2000. " Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March.
When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:29:y:2012:i:5:p:2049-2057. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.