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Inequality and Growth in a Knowledge Economy

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  • Kunal Dasgupta

Abstract

We develop a two sector growth model to understand the relation between inequality and growth. Agents, who are endowed with different levels of knowledge, select either into a retail or a manufacturing sector. Agents in the manufacturing sector match to carry out production. A by-product of production is creation of ideas that spill over to the retail sector and improve productivity, thereby causing growth. Ideas are generated according to an idea production function that takes the knowledge of all the agents in a firm as arguments. We go on to study how an increase in the inequality of the knowledge distribution affects the growth rate. A change in the distribution not only affects the occupational choice of agents, but also the way agents match within the manufacturing sector. We show that if the idea generation function is sufficiently convex, an increase in inequality raises the growth rate of the economy.

Suggested Citation

  • Kunal Dasgupta, 2010. "Inequality and Growth in a Knowledge Economy," Working Papers tecipa-411, University of Toronto, Department of Economics.
  • Handle: RePEc:tor:tecipa:tecipa-411
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    References listed on IDEAS

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    1. Kunal Dasgupta, 2009. "Learning, Knowledge Diffusion and the Gains from Globalization," Working Papers tecipa-364, University of Toronto, Department of Economics.
    2. Cecilia Garcia-Penalosa & Eve Caroli & Philippe Aghion, 1999. "Inequality and Economic Growth: The Perspective of the New Growth Theories," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1615-1660, December.
    3. Isaac Ehrlich & Francis T. Lui, 1999. "Bureaucratic Corruption and Endogenous Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 107(S6), pages 270-293, December.
    4. Oded Galor & Joseph Zeira, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Oxford University Press, vol. 60(1), pages 35-52.
    5. Luis Garicano, 2000. "Hierarchies and the Organization of Knowledge in Production," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 874-904, October.
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    More about this item

    Keywords

    Inequality; growth; idea generation; matching; knowledge;
    All these keywords.

    JEL classification:

    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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