Inequality-Driven Growth: Unveiling Aggregation Effects in Growth Equations

Pedro Albuquerque

No 7, Econometric Society 2004 Latin American Meetings from Econometric Society

Abstract: This paper presents a simple Cass-Koopmans-Ramsey AK growth model with heterogeneity that explains how policies that increase income inequality may temporarily boost a country’s income growth rate. Briefly put, a change in policy that reduces redistributive transfers will free up resources to the households with the highest productivities, resulting in an aggregate growth rate increase that will endure until new limits to differentiated accumulation are found. The unambiguous effect takes place in poor and rich countries alike, arising from productivity heterogeneity and redistribution (although it could also arise from other sources of heterogeneity). The effect is explicitly captured in the aggregate growth equation by the changes of the mean logarithmic deviation (MLD or Theil’s second measure) of the income. The model supports the empirical results found in Forbes (AER, 2000). The accelerated growth episodes observed in Brazil from 1968 to 1973 and in China recently are shown to be empirically consistent with the model. If the model predictions are correct, Chinese growth rates may eventually fall, following a pattern that, even if not presenting the same magnitude, could resemble the one observed during the Brazilian slowdown

Keywords: Inequality; Growth; Income Distribution; Redistribution; Heterogeneity; AK Model; Brazil; China (search for similar items in EconPapers)
JEL-codes: O15 O41 O50 (search for similar items in EconPapers)
Date: 2004-08-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Inequality-Driven Growth: Unveiling Aggregation Effects in Growth Equations (2004)
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