The effect of inequality on growth: Theory and evidence from the Indian states

Sugata Ghosh () and Sarmistha Pal ()

Development and Comp Systems from EconWPA

Abstract: This paper examines the effect of inequality on growth among the sub- national states in India. Theoretically, growth of the regional economy is driven by productive public investment in the provision of health and education services financed by a linear output tax, and the optimum tax rate is determined by the median voter. Unlike the existing results, we obtain an ambiguous relationship between initial inequality and subsequent economic growth. Analysis of the Indian state-level data suggests that rural inequality influences growth of total output more than urban inequality, and does so, negatively. The indicator of intersectoral inequality is more important in explaining sectoral output growth.

Keywords: Endogenous growth; inequality; public investment; optimum tax rate; panel data analysis; Indian states. (search for similar items in EconPapers)
JEL-codes: E62 H21 H54 O53 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev, nep-mac and nep-pbe
Date: 2003-09-09
Note: Type of Document - ; pages: 20
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http://129.3.20.41/eps/dev/papers/0309/0309006.pdf (application/pdf)

Related works:
Journal Article: The Effect of Inequality on Growth: Theory and Evidence from the Indian States (2004)
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