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Inverted u-shaped relationship between inequality and economic performance

  • Yuichiro Matsumoto

    ()

    (Graduate School of Economics, Osaka University)

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    This paper shows that in a borrowing-constrained economy, a median level of inequality stimulates investment, whereas low and high levels of inequality dampen investment. This nonlinearity is a result of two effects. There are more rich individuals in an equal economy than in an unequal economy. Therefore, more individuals can invest. However, in an equal economy, rich individuals have less wealth than they would in an unequal economy, which can dampen investment. My paper shows that these two effects produce nonlinearity if investment is indivisible.

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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/1419.pdf
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    Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 14-19.

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    Length: 19 pages
    Date of creation: Apr 2014
    Date of revision:
    Handle: RePEc:osk:wpaper:1419
    Contact details of provider: Web page: http://www.econ.osaka-u.ac.jp/
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    1. Holmstrom, B & Tirole, J, 1996. "Private and Public Supply of Liquidity," Working papers 96-21, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. Alesina, Alberto F & Rodrik, Dani, 1991. "Distributive Politics and Economic Growth," CEPR Discussion Papers 565, C.E.P.R. Discussion Papers.
    3. Abhijit V. Banerjee & Andrew F. Newman, 1990. "Occupational Choice and the Process of Development," Discussion Papers 911, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    4. Virgiliu Midrigan & Daniel Yi Xu, 2010. "Finance and Misallocation: Evidence from Plant-level Data," NBER Working Papers 15647, National Bureau of Economic Research, Inc.
    5. Abhijit V. Banerjee & Benjamin Moll, 2010. "Why Does Misallocation Persist?," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 189-206, January.
    6. Li, Hongyi & Zou, Heng-fu, 1998. "Income Inequality Is Not Harmful for Growth: Theory and Evidence," Review of Development Economics, Wiley Blackwell, vol. 2(3), pages 318-34, October.
    7. Ghatak, Maitreesh & Nien-Huei Jiang, Neville, 2002. "A simple model of inequality, occupational choice, and development," Journal of Development Economics, Elsevier, vol. 69(1), pages 205-226, October.
    8. Ricardo J. Caballero & Takeo Hoshi & Anil K. Kashyap, 2008. "Zombie Lending and Depressed Restructuring in Japan," American Economic Review, American Economic Association, vol. 98(5), pages 1943-77, December.
    9. Francisco J. Buera & Benjamin Moll, 2012. "Aggregate Implications of a Credit Crunch," NBER Working Papers 17775, National Bureau of Economic Research, Inc.
    10. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August.
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