Transitional Growth and Income Inequality: Anything Goes
The effect of initial income inequality on growth is the subject of a large literature. We show, both analytically and with simulation experiments, that the same level of initial income inequality can be associated with very different income developments, depending on the source of the inequality. We consider three sources: differences in asset ownership, in productivity and in shocks. For these three sources the monotonicity, the persistence and even the sign of the resulting income changes can differ. We stress the implications for empirical work.
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