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Threshold Effects of Inequality on Economic Growth in the US States: The Role of Human Capital to Physical Capital Ratio

Oguzhan Cepni (), Rangan Gupta () and Zhihui Lv ()
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Oguzhan Cepni: Central Bank of the Republic of Turkey, Anafartalar Mah. Istiklal Cad. No:10 06050, Ankara, Turkey
Zhihui Lv: KLASMOE & School of Mathematics and Statistics, Northeast Normal University, Changchun 130024, China

No 201968, Working Papers from University of Pretoria, Department of Economics

Abstract: Theory suggests that the effect of inequality on growth varies with the level of economic development, as captured by the ratio of human capital to physical capital. In particular, the effect is shown to be positive at lower levels of this ratio, and turns negative beyond a threshold in such models. Using a comprehensive panel of annual data for the 48 contiguous US states over the period 1948 to 2014, we find overwhelming evidence in support of this theory, unlike prior work on this topic. Hence, our paper highlights the importance of accurately measuring the process of economic development using data on human capital and physical capital, instead of using proxies that are not theoretically consistent. Understandably, if not done so, policymakers would end up undertaking incorrect decisions.

Keywords: Inequality; Economic Growth; Ratio of Human Capital to Physical Capital; Panel Threshold Model; State-Level Data of the United States (search for similar items in EconPapers)
JEL-codes: C23 C24 E24 O11 O15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-gro and nep-mac
Date: 2019-08
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