Inverted u-shaped relationship between inequality and economic performance

Yuichiro Matsumoto ()
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Yuichiro Matsumoto: Graduate School of Economics, Osaka University

No 14-19, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: This paper shows that in a borrowing-constrained economy, a median level of inequality stimulates investment, whereas low and high levels of inequality dampen investment. This nonlinearity is a result of two effects. There are more rich individuals in an equal economy than in an unequal economy. Therefore, more individuals can invest. However, in an equal economy, rich individuals have less wealth than they would in an unequal economy, which can dampen investment. My paper shows that these two effects produce nonlinearity if investment is indivisible.

Keywords: Economic development; Indivisible investment; Misallocation of capital (search for similar items in EconPapers)
JEL-codes: O11 O16 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2014-04
New Economics Papers: this item is included in nep-pbe
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