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Inequality, Too Much of a Good Thing

  • Alan Krueger

As the title of this essay suggests, I believe there are both positive and negative effects of inequality. On the positive side, differential rewards provide incentives for individuals to work hard, invest and innovate. On the negative side, differences in rewards that are unrelated to productivity – due to racial discrimination, for example – are corrosive to civil society and cause resources to be misallocated. Even if discrimination did not exist, however, income inequality would be problematic in a democratic society if those who are privileged use their economic muscle to curry favor in the political arena and thereby secure monopoly rents or other advantages. Moreover, for several reasons discussed in the next section, poverty and income inequality create negative externalities. Consequently, it can be in the interest of the wealthy as well as the poor to raise the incomes of the poor, especially by using education and training as a means for redistribution.

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Paper provided by Princeton University, Department of Economics, Industrial Relations Section. in its series Working Papers with number 845.

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Date of creation: Apr 2002
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Handle: RePEc:pri:indrel:dsp01cj82k729k
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