GLOBAL POVERTY REDUCTION AND PARETO-IMPROVING REDISTRIBUTION

Angus Chu

Macroeconomic Dynamics, 2012, vol. 16, issue 4, 605-624

Abstract: Can a transfer of wealth from the United States to the least developed countries be Pareto improving? We analyze this question in an open-economy R&D-based growth model, in which the high-income (low-income) country produces innovative (homogeneous) goods. We find that wealth redistribution to the low-income country simultaneously reduces global inequality and increases economic growth through an increase in labor supply in the high-income country. Given that the market equilibrium of R&D-based growth models is usually inefficient due to R&D externalities, the wealth redistribution may lead to a Pareto improvement, which occurs if the discount rate is sufficiently low or R&D productivity is sufficiently high.

Date: 2012
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Working Paper: Global poverty reduction and Pareto-improving redistribution (2009)
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