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Turbulent Growth and Inquality


  • Jones, R.
  • Newman, G.


This paper develops a theory of income distribution in a growing economy from a search theoretic foundation. It focuses on a 'turbulent' growth process in which individual payoffs from ongoing advance hinge on search effort but are transient in the sense that each successive growth shock outdoes the informational advantage of previous winners. When agents' fortunes are realized in a sequence of growth states, basic results about the distribution of permanent income can be derived from the interplay of the negative effects of turbulence on search effort in each state and its positive effects on income mobility over states. No reference need be made to individual differences in initial circumstances, abilities to accumulate capital, or attitudes towards risk. The major result is that, for a population of (almost) identical agents, as the frequency of growth shocks is increased from zero, the variance of permanent income exhibits an inverted U shape. This implies that an increase in turbulence (from a low initial level) or a decrease in turbulence (from a high level) can both increase long-run equality. The framework also illustrates the deficiencies of both cross-sectional measures of dispersion and the traditional trade-off between growth and equity. In the case where growth leads to the 'democratization of poverty', uniformly high cross sectional variances can coexist with a low variance of permanent income, while mean incomes are falling.

Suggested Citation

  • Jones, R. & Newman, G., 1999. "Turbulent Growth and Inquality," Discussion Papers dp99-6, Department of Economics, Simon Fraser University.
  • Handle: RePEc:sfu:sfudps:dp99-6

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    References listed on IDEAS

    1. Dow, G & Putterman, L, 1996. "Why Capital (Usually) Hires Labor : An Assessment of Proposed Explanations," Discussion Papers dp97-03, Department of Economics, Simon Fraser University.
    2. Putterman, Louis & Skillman, Gilbert L., 1992. "The role of exit costs in the theory of cooperative teams," Journal of Comparative Economics, Elsevier, vol. 16(4), pages 596-618, December.
    3. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    4. Gregory Dow, 1996. "Replicating Walrasian equilibria using markets for membership in labor-managed firms," Review of Economic Design, Springer;Society for Economic Design, vol. 2(1), pages 147-162, December.
    5. Dow, Gregory K, 1993. "Why Capital Hires Labor: A Bargaining Perspective," American Economic Review, American Economic Association, vol. 83(1), pages 118-134, March.
    6. Dong Xiao-yuan & Dow Gregory K., 1993. "Does Free Exit Reduce Shirking in Production Teams?," Journal of Comparative Economics, Elsevier, vol. 17(2), pages 472-484, June.
    7. David Andolfatto & Ed Nosal, 1997. "Optimal Team Contracts," Canadian Journal of Economics, Canadian Economics Association, vol. 30(2), pages 385-396, May.
    8. Dow, Gregory K., 1986. "Control rights, competitive markets, and the labor management debate," Journal of Comparative Economics, Elsevier, vol. 10(1), pages 48-61, March.
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    Cited by:

    1. Olsson, Ola & Hibbs, Douglas Jr., 2005. "Biogeography and long-run economic development," European Economic Review, Elsevier, vol. 49(4), pages 909-938, May.

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    JEL classification:

    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration


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