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Does Equality Promote Growth?

Author

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  • Fölster , Stefan

    (Research Institute of Industrial Economics (IFN))

  • Trofimov, Georgi

    (Research Institute of Industrial Economics (IFN))

Abstract

Several recent articles claim that pre-tax income equality promotes growth. Equality is argued to dampen demand for redistributive economic policies that tax returns to growth-enhancing activities such as investment. These results rest heavily on the assumption that pre-tax income equality is an exogenous parameter. We suggest that taking account of endogenous influences on pre-tax income equality changes both theoretical and empirical conclusions significantly. First, we extend previous theoretical models by letting income equality be endogenously determined. This leads to the conclusion that equality does not cause growth, although there may be a positive or negative correlation. Second, it is shown that previously reported positive empirical relationships between equality and growth turn insignificant or weakly negative when the omitted variables suggested by our model are taken into account.

Suggested Citation

  • Fölster , Stefan & Trofimov, Georgi, 1996. "Does Equality Promote Growth?," Working Paper Series 461, Research Institute of Industrial Economics.
  • Handle: RePEc:hhs:iuiwop:0461
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    References listed on IDEAS

    as
    1. Bertola, Giuseppe, 1993. "Factor Shares and Savings in Endogenous Growth," American Economic Review, American Economic Association, vol. 83(5), pages 1184-1198, December.
    2. Alesina, Alberto & Perotti, Roberto, 1996. "Income distribution, political instability, and investment," European Economic Review, Elsevier, vol. 40(6), pages 1203-1228, June.
    3. Roberto Perotti, 1993. "Political Equilibrium, Income Distribution, and Growth," Review of Economic Studies, Oxford University Press, vol. 60(4), pages 755-776.
    4. Saint-Paul, Gilles & Verdier, Thierry, 1993. "Education, democracy and growth," Journal of Development Economics, Elsevier, vol. 42(2), pages 399-407, December.
    5. Jacob Mincer, 1989. "Human Capital Responses to Technological Change in the Labor Market," NBER Working Papers 3207, National Bureau of Economic Research, Inc.
    6. Oded Galor & Joseph Zeira, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Oxford University Press, vol. 60(1), pages 35-52.
    7. Aghion, Philippe & Bolton, Patrick, 1992. "Distribution and growth in models of imperfect capital markets," European Economic Review, Elsevier, vol. 36(2-3), pages 603-611, April.
    8. Lindbeck, Assar & Snower, Dennis J., 1995. "Restructuring Production and Work," CEPR Discussion Papers 1323, C.E.P.R. Discussion Papers.
    9. Jacob Mincer, 1991. "Human Capital, Technology, and the Wage Structure: What Do Time Series Show?," NBER Working Papers 3581, National Bureau of Economic Research, Inc.
    10. Perotti, Roberto, 1994. "Income distribution and investment," European Economic Review, Elsevier, vol. 38(3-4), pages 827-835, April.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    TAX POLICY; ECONOMIC GROWTH; INVESTMENTS;

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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