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On the Welfare Gains of Growth and Welfare Costs of Inequality

Author

Listed:
  • Juan Carlos Cordoba

    (Rice University)

  • Genevieve Verdier

    (Texas A&M University)

Abstract

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.

Suggested Citation

  • Juan Carlos Cordoba & Genevieve Verdier, 2005. "On the Welfare Gains of Growth and Welfare Costs of Inequality," Macroeconomics 0507016, EconWPA, revised 17 Jul 2005.
  • Handle: RePEc:wpa:wuwpma:0507016
    Note: Type of Document - pdf; pages: 22
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    File URL: http://econwpa.repec.org/eps/mac/papers/0507/0507016.pdf
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    References listed on IDEAS

    as
    1. Dirk Kreuger & Fabrizio Perri, 2002. "Does Income Inequality Lead to Consumption Inequality? Evidence and Theory," Working Papers 02-15, New York University, Leonard N. Stern School of Business, Department of Economics.
    2. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-357, April.
    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. Xavier Sala-i-Martin, 2001. "The disturbing 'rise' of global income inequality," Economics Working Papers 616, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2002.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Welfare cost; business cycles; economic growth; inequality;

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • D3 - Microeconomics - - Distribution

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