The Institutional Foundations of Inequality and Growth

Lewis Davis and Mark Hopkins

The Journal of Development Studies, 2011, vol. 47, issue 7, pages 977-997

Abstract: After a decade of research, the effect of inequality on long-run economic growth remains unresolved, in part because researchers have treated omitted variable bias as an estimation problem rather than a deeper question of causality. In this article we argue that the key omitted variable is the quality of economic institutions. Using both cross-country and panel data specifications, we find no direct effect of inequality on growth in the long-run. Rather, the protection of property rights simultaneously raises growth rates and reduces income inequality. We interpret these findings as evidence that insecure property rights disproportionately disadvantage the poor.

Date: 2011
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