From Physical to Human Capital Accumulation: Inequality in the Process of Development

Oded Galor () and Omer Moav ()

No 2307, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper presents a unified theory that provides an intertemporal reconciliation between conflicting viewpoints about the effect of inequality on economic growth. It argues that the replacement of physical capital accumulation by human capital accumulation as a prime engine of economic growth has changed the qualitative impact of inequality on the process of development. In early stages of industrialization as physical capital accumulation is a prime source of economic growth, inequality enhances the process of development by channeling resources towards individuals whose marginal propensity to save is higher. In later stages of development, however, as the return to human capital increases due to capital-skill complementarity, human capital becomes the prime engine of growth and equality, given credit constraints, stimulating investment in human capital and economic growth. As wages increase, however, credit constraints become less binding and the overall effect of inequality becomes insignificant.

Keywords: Credit Constraints; Growth; Human Capital; Income Distributions (search for similar items in EconPapers)
JEL-codes: O11 O15 O40 (search for similar items in EconPapers)
Date: 1999-12
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Related works:
Working Paper: From Physical to Human Capital Accumulation: Inequality and the Process of Development (2004)
Working Paper: From Physical to Human Capital Accumulation: Inequality in the Process of Development (1999)
Journal Article: From Physical to Human Capital Accumulation: Inequality and the Process of Development (2004)
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