Inequality and Growth: A Semiparametric Investigation

Dustin Chambers ()
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Dustin Chambers: Salisbury University public

No 132, Computing in Economics and Finance 2005 from Society for Computational Economics

Abstract: The relationship between income inequality and economic growth is re-examined using a semiparametric, dynamic panel data model. Significant empirical evidence is uncovered supporting the theory that the relationship between these variables is nonlinear. Additionally, the evidence also supports the conclusion that other important economic variables, notably past inequality and the rate of investment, directly affect the relationship between base period inequality and subsequent 5-year growth. The results of this paper suggest that higher income inequality (regardless of the magnitude of change) and small reductions in income inequality both reduce subsequent growth. Interestingly, large reductions in income inequality are growth promoting. Moreover, it is found that lower investment rates mitigate the negative effects of higher inequality on growth. It is shown that these results, collectively, are consistent with both a simple political economy model with costly bargaining and an economic growth model with capital-skill complementarities and imperfect credit markets

Keywords: Economic Growth; Income Inequality; Capital-Skill Complementarity; Semiparametric Dynamic Panel (search for similar items in EconPapers)
JEL-codes: E22 H52 O40 (search for similar items in EconPapers)
Date: 2005-11-11
New Economics Papers: this item is included in nep-dev and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecf5:132

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