Inequality and Growth: How Social Mobility Reshapes The Main Theoretical Channels

Ignacio Campomanes

No 599, Working Papers from ECINEQ, Society for the Study of Economic Inequality

Abstract: This paper analyzes how the different mechanisms proposed to explain the inequality-growth relation are affected by the introduction of social mobility in a politico-economic environment with imperfect tax enforcement. I show that the direct negative effect of inequality on growth predicted by models of incomplete markets is especially pronounced in societies with low social mobility, while it is lessened in highly mobile economies. This is due the different effects of the increase in inequality on redistribution in each case. Conversely, in models where inequality favors economic growth because of investment indivisibilities or heterogeneity in marginal propensities to save among the population, the opposite result applies. Inequality is especially beneficial for economic growth when social mobility is low, as the compensating effect of redistribution is reduced. Finally, exogenous taxation costs modulate the previous findings depending on whether redistribution helps or retards economic growth. Conditional correlations of market inequality and economic growth across countries point to an important modulating effect of social mobility.

Keywords: Inequality; Social Mobility; Economic Growth; Taxation (search for similar items in EconPapers)
JEL-codes: E24 E62 O43 P16 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2022-01
New Economics Papers: this item is included in nep-cwa, nep-gro and nep-mac
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