Explaining the Evidence on Inequality and Growth: Informality and Redistribution

Lewis S. Davis

DEGIT Conference Papers from DEGIT, Dynamics, Economic Growth, and International Trade

Abstract: Please do note quote without permission of author. - This paper constructs a simple model that can account for both the negative relationship between growth and income inequality observed in the cross-country data and the positive relationship observed within countries over time. The model employs a dual-economy structure with formal and informal sectors. Growth is driven by formal sector human capital spillovers. Restrictive institutions impose barriers to formality that reduce the growth rate and increase inequality. Redistributive taxation lowers inequality but blunts the incentive to accumulate, lowering growth. Institutional structures vary more across than within countries. Consequently, variations in institutional barriers to formality may account for the negative relationship between growth and inequality found in the cross-country data. Variations in the intensity of redistribution may account for the positive relationship observed within countries over time.

Keywords: Growth; Inequality; Dualism; Informal Sector; Institutions (search for similar items in EconPapers)
JEL-codes: D31 O17 O41 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2004-06
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Persistent link: https://EconPapers.repec.org/RePEc:deg:conpap:c009_032

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