Economic growth and income inequality: Non-linearities and income level threshold effect

Charles-Henri DiMaria

MPRA Paper from University Library of Munich, Germany

Abstract: Despite the pioneering works of Kuznets and Kaldor in the mid-fifties, it was not until the nineties that economists began to thoroughly investigate whether income inequality is detrimental or conducive to growth. A brief survey of the literature does not yield a definitive conclusion. Some authors argue that inequality is beneficial, as higher-income populations are more likely to save and invest in innovative activities. Conversely, other authors contend that concentrating income in the hands of a few limits the number of potential investors, hinders the development of markets and industries with increasing returns, and may dis-incentivize investment in human capital. Since the mid-nineties, most empirical studies attempting to uncover a link between income inequality and growth have concluded that the relationship is predominantly negative. In this study, we reveal a more complex link, characterized by an inverted-U shape that is mostly negative and only applicable to countries with intermediate income per capita. For poor and rich countries, this link does not exist. We employ a panel threshold model approach, introducing income inequality in linear, quadratic, and cubic forms to allow for potential linear, U-shaped, inverted-U-shaped, and even more complex relationships between inequality and growth.

Keywords: Income inequality; growth regression; panel threshold. (search for similar items in EconPapers)
JEL-codes: C23 D63 O47 (search for similar items in EconPapers)
Date: 2025, Revised 2025
New Economics Papers: this item is included in nep-gro and nep-hme
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/126418/1/MPRA_paper_126418.pdf original version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:126418

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().