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Growth, Income Inequality, and Fiscal Policy: What Are the Relevant Trade-offs?

  • CECILIA GARCÍA-PEÑALOSA
  • STEPHEN J. TURNOVSKY

We develop an endogenous growth model with elastic labor supply, in which agents differ in their initial endowments of physical capital. In this context, the growth rate and the distribution of income are jointly determined. We then examine the distributional impact of different ways of financing an investment subsidy. Policies aimed at increasing the growth rate result in a more unequal distribution of pre-tax income, consistent with the positive correlation between income inequality and growth observed in the recent empirical literature. However, there is no conflict between efficiency and equity if inequality is measured in terms of the distribution of welfare. Copyright 2007 The Ohio State University.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.0022-2879.2007.00029.x
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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 39 (2007)
Issue (Month): 2-3 (03)
Pages: 369-394

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Handle: RePEc:mcb:jmoncb:v:39:y:2007:i:2-3:p:369-394
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Cecilia Garcia-Penalosa & Eve Caroli & Philippe Aghion, 1999. "Inequality and Economic Growth: The Perspective of the New Growth Theories," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1615-1660, December.
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  12. Cecilia Garcia-Penalosa & Stephen Turnovsky, 2005. "Growth and Income Inequality: A Canonical Model," Working Papers UWEC-2006-04-P, University of Washington, Department of Economics, revised Jan 2005.
  13. Anthony C. Atkinson, 2003. "Income Inequality in OECD Countries: Data and Explanations," CESifo Working Paper Series 881, CESifo Group Munich.
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  20. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
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