Inequality and Growth

Roland Benabou

No 1450, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Using two unifying models and an empirical exercise, this paper presents and extends the main theories linking income distribution and growth, as well as the relevant empirical evidence. The first model integrates the political-economy and imperfect capital markets theories. It allows for departures from perfect democracy and embodies the trade-off between the growth costs and benefits of redistribution through taxes, land reform or public schooling: such policies simultaneously depress savings incentives and ameliorate the wealth constraints that impede investment by the poor. The second model is a growth version of the prisoner’s dilemma, which captures the essence of theories where sociopolitical conflict reduces the security of property rights, thereby discouraging accumulation. The economy’s growth rate is shown to fall with interest groups’ rent-seeking abilities, as well as with the gap between rich and poor. It is not income inequality per se that matters, however, but inequality in the relative distribution of earning and political power. For each of the three channels of political economy, capital markets and social conflict, the empirical evidence is surveyed and discussed in conjunction with the theoretical analysis. Lastly, the possibility of multiple steady states leads me to take up a new empirical issue: are cross-country differences in inequality permanent, or gradually narrowing? Equivalently, is there convergence not just in the first moment of individual income (GDP per capita), but convergence in distribution?

Keywords: Credit Constraint; Growth; Income Distribution; Inequality; Political Economy; Political Instability; Property Rights; Redistribution (search for similar items in EconPapers)
JEL-codes: D31 D72 E62 O11 (search for similar items in EconPapers)
Date: 1996-07
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Citations: View citations in EconPapers (570)

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Related works:
Chapter: Inequality and Growth (1996)
Working Paper: Inequality and Growth (1996)
Working Paper: Inequality and Growth (1996)
Working Paper: Inequality and Growth (1996)
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