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Political Equilibrium, Income Distribution, and Growth

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  • Roberto Perotti

Abstract

This paper analyzes the impact of income distribution on growth when investment in human capital is the source of growth and individuals vote over the degree of redistribution in the economy. The model has three main features. First, very different patterns of income distribution are conducive to high growth at different levels of per capita income. Second, growth is associated with an externality whereby investment in human capital by one group increases the productivity of other groups, thus potentially enabling them to invest in human capital. Third, the initial pattern of income distribution and the resulting political equilibrium are crucial in determining whether the transmission of this externality is promoted, in which case growth is enhanced, or prevented, in which case growth is stopped. Using a non-overlapping generations model with voting, I derive several empirical implications. In particular, the model implies an inverted-U relation between levels of inequality and levels of income in cross-sections, but not necessarily in time series, a result that seems consistent with a number of empirical studies.

Suggested Citation

  • Roberto Perotti, 1993. "Political Equilibrium, Income Distribution, and Growth," Review of Economic Studies, Oxford University Press, vol. 60(4), pages 755-776.
  • Handle: RePEc:oup:restud:v:60:y:1993:i:4:p:755-776.
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    File URL: http://hdl.handle.net/10.2307/2298098
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    References listed on IDEAS

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    1. Roberts, Kevin W. S., 1977. "Voting over income tax schedules," Journal of Public Economics, Elsevier, vol. 8(3), pages 329-340, December.
    2. Hollis Chenery† & T.N. Srinivasan (ed.), 1988. "Handbook of Development Economics," Handbook of Development Economics, Elsevier, edition 1, volume 1, number 1.
    3. Romer, Thomas, 1975. "Individual welfare, majority voting, and the properties of a linear income tax," Journal of Public Economics, Elsevier, vol. 4(2), pages 163-185, February.
    4. Ram, Rati, 1988. "Economic development and income inequality: Further evidence on the U-curve hypothesis," World Development, Elsevier, vol. 16(11), pages 1371-1376, November.
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