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Income inequality and economic growth

  • Shin, Inyong

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.

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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 29 (2012)
Issue (Month): 5 ()
Pages: 2049-2057

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Handle: RePEc:eee:ecmode:v:29:y:2012:i:5:p:2049-2057
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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