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Inequality and growth: The cholesterol hypothesis

Gustavo Marrero () and Juan Rodríguez ()

No 501, Working Papers from ECINEQ, Society for the Study of Economic Inequality

Abstract: A fundamental unsolved question in economics is whether inequality is good or bad for growth. We argue here that this lack of consensus is due to the cholesterol hypothesis. This hypothesis states that the part of inequality generated by factors beyond the individuals’ control, referred to as inequality of opportunity (IO), is growth-deterring, while the type of inequality generated by the difference in the willingness to exert effort, referred to as inequality of pure effort (IE), is growth-enhancing. We first build an overlapping generation model with human capital to derive a reduced-form growth equation consistent with this hypothesis, and the existing interaction between poverty and inequality. Then, given the inherent difficulty to decompose total inequality into IO and IE, we develop a strategy to test the cholesterol hypothesis: by extending the standard inequality-growth equation with a proxy of IO, the estimated coefficient of inequality must increase, while the coefficient of the IO proxy must be negative. Next, we use the best available data at worldwide level and, given the limitations of the existing IO indices, we construct an alternative proxy of IO by considering that the quality of institutions and ethnic and religious tensions are relevant macroeconomic drivers of IO. Using an instrumental variable approach and different samples and IO measures, our results do not reject the cholesterol hypothesis at worldwide level.

Keywords: growth; inequality; inequality of opportunity; poverty; human capital. (search for similar items in EconPapers)
JEL-codes: O40 D63 E24 I32 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2019-07
New Economics Papers: this item is included in nep-gro and nep-ltv
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