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On the Welfare Gains of Growth and Welfare Costs of Inequality

  • Juan Carlos Cordoba

    (Rice University)

  • Genevieve Verdier

    (Texas A&M University)

This note extends Lucas' (1987) analysis to assess welfare gains of economic growth and welfare costs of consumption inequality, both within and across countries. We find that the welfare costs of inequality are significantly larger than the gains of economic growth. While the gains of economic growth are equivalent to a permanent increase of 26\% in per-capita consumption, the costs of within-country and cross-country inequality are equivalent to a permanent reduction in per-capita consumption of 45% and 90% respectively. A benevolent planner would accept a negative growth rate of 1% (instead of the baseline positive rate of 2.1%) in exchange for the elimination of all within-country inequality. The gains of economic growth are equivalent to those of reducing within-country inequality by approximately 1/3.

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File URL: http://128.118.178.162/eps/mac/papers/0507/0507016.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0507016.

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Length: 22 pages
Date of creation: 15 Jul 2005
Date of revision: 17 Jul 2005
Handle: RePEc:wpa:wuwpma:0507016
Note: Type of Document - pdf; pages: 22
Contact details of provider: Web page: http://128.118.178.162

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  1. Xavier Sala-i-Martin, 2002. "The disturbing "rise" of global income inequality," Discussion Papers 0102-44, Columbia University, Department of Economics.
  2. Dirk Krueger & Fabrizio Perri, 2005. "Does income inequality lead to consumption equality? evidence and theory," Staff Report 363, Federal Reserve Bank of Minneapolis.
  3. TallariniJr., Thomas D., 2000. "Risk-sensitive real business cycles," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 507-532, June.
  4. Beaudry, Paul & Pages, Carmen, 2001. "The cost of business cycles and the stabilization value of unemployment insurance," European Economic Review, Elsevier, vol. 45(8), pages 1545-1572, August.
  5. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
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