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Growth and income inequality: a canonical model

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  • Cecilia García-Peñalosa

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  • Stephen Turnovsky

Abstract

We develop an endogenous growth model with elastic labor supply, in which agents differ in their initial endowments of physical capital. In this framework, the growth rate and the distribution of income are jointly determined. The key equilibrating variable is the equilibrium labor supply. It determines the rate of return to capital, which in turn affects both the rate of capital accumulation and the distribution of income across agents. We then examine the impact of various structural shocks on growth and distribution. We find that faster growth is associated with a more unequal, contemporaneous distribution of income, consistent with recent empirical findings. Copyright Springer-Verlag Berlin/Heidelberg 2006

Suggested Citation

  • Cecilia García-Peñalosa & Stephen Turnovsky, 2006. "Growth and income inequality: a canonical model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 28(1), pages 25-49, May.
    • Handle: RePEc:spr:joecth:v:28:y:2006:i:1:p:25-49
    DOI: 10.1007/s00199-005-0616-7
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