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Growth and Inequality: Dependence of the Time Path of Productivity Increases (and other Structural Changes)

  • Manoj Atolia

    ()

    (Department of Economics, Florida State University)

  • Santanu Chatterjee

    ()

    (Department of Economics, Terry College of Business, University of Georgia)

  • Stephen J. Turnovsky

    ()

    (Department of Economics, University of Washington)

This paper examines the significance of the time path of a given productivity increase on growth and inequality. We show that whereas the time path impacts only the transitional path of aggregate quantities and has no effect on their ultimate steady-state levels, it has both transitional and permanent consequences for wealth and income distribution. As a result, the growth-inequality trade-off generated by a given discrete increase in productivity contrasts sharply with that obtained when the same ultimate productivity increase is acquired gradually. This is true both in transition and across steady states. We show that a gradual productivity increase can generate a Kuznets-type inverted U-shaped relationship between inequality and per-capita income. The distance from the technology frontier is also shown to have important implications for both the magnitude and persistence of inequality. Finally, our results suggest that economies with similar aggregate structural characteristics may have very different outcomes for income and wealth inequality, depending on the intrinsic nature of the productivity growth path.

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File URL: ftp://econpapers.fsu.edu/RePEc/fsu/wpaper/wp2009_01_02.pdf
File Function: First version, 2008-12
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Paper provided by Department of Economics, Florida State University in its series Working Papers with number wp2009_01_02.

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Length: 37
Date of creation: Jan 2009
Date of revision:
Handle: RePEc:fsu:wpaper:wp2009_01_02
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  16. Atolia, Manoj & Chatterjee, Santanu & Turnovsky, Stephen J., 2010. "How misleading is linearization? Evaluating the dynamics of the neoclassical growth model," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1550-1571, September.
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