Working Paper: CEPR ID: DP1450
Authors: Roland Benabou
Abstract: Using two unifying models and an empirical exercise, this paper presents and extends the main theories linking income distribution and growth, as well as the relevant empirical evidence. The first model integrates the political-economy and imperfect capital markets theories. It allows for departures from perfect democracy and embodies the trade-off between the growth costs and benefits of redistribution through taxes, land reform or public schooling: such policies simultaneously depress savings incentives and ameliorate the wealth constraints that impede investment by the poor. The second model is a growth version of the prisoner?s dilemma, which captures the essence of theories where sociopolitical conflict reduces the security of property rights, thereby discouraging accumulation. The economy?s growth rate is shown to fall with interest groups? rent-seeking abilities, as well as with the gap between rich and poor. It is not income inequality per se that matters, however, but inequality in the relative distribution of earning and political power. For each of the three channels of political economy, capital markets and social conflict, the empirical evidence is surveyed and discussed in conjunction with the theoretical analysis. Lastly, the possibility of multiple steady states leads me to take up a new empirical issue: are cross-country differences in inequality permanent, or gradually narrowing? Equivalently, is there convergence not just in the first moment of individual income (GDP per capita), but convergence in distribution?
Keywords: growth; inequality; income distribution; political economy; redistribution; credit constraints; political instability; property rights
JEL Codes: 031; 072; E62; 011
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased income inequality (D31) | Greater political pressure for redistribution (H19) |
| Greater political pressure for redistribution (H19) | Negative impact on investment (F64) |
| Negative impact on investment (F64) | Negative impact on growth (F69) |
| Increased income inequality (D31) | Negative impact on growth (F69) |
| Socio-political conflict (D74) | Undermining property rights (P14) |
| Undermining property rights (P14) | Reduction in economic growth rate (F62) |
| Greater income disparities (D31) | Socio-political conflict (D74) |
| Inequality in political influence (D72) | Exacerbation of negative growth effects associated with economic inequality (F62) |