The effects of inequality on growth: a survey of the theoretical and empirical literature

Christophe Ehrhart ()
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Christophe Ehrhart: CRESS-Lessor, Université Rennes 2 - Haute Bretagne

No 107, Working Papers from ECINEQ, Society for the Study of Economic Inequality

Abstract: Basically, the extensive theoretical and empirical literature on the interactions between growth/development and distribution can be divided into two main approaches. The first one examines the impact of economic development on income distribution in a long run perspective. The second one focuses on the inverse causality between inequality and growth. This paper aims at reviewing this second view about the effects of initial inequality of income and wealth on future growth rate. The theoretical literature suggests several channels through which inequality might be harmful for growth, namely three economic explanations (the channel of the capital market imperfections, the approach of endogenous fertility, the argument relating to the domestic market size) and two politico-economic arguments (the approach of endogenous fiscal policy and the political instability channel). The following conclusions can be drawn from our survey of the empirical studies regarding the relationship between inequality and growth: first, only the endogenous fertility approach and the explanation based on political instability receive convincing support from the data. Second, initial inequality of assets has a negative and significant effect on subsequent growth. As a result, wealth redistribution is likely to enhance future growth.

Keywords: Inequality; Growth (search for similar items in EconPapers)
JEL-codes: O15 O40 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2009
New Economics Papers: this item is included in nep-dev and nep-fdg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (47)

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