Working Paper: CEPR ID: DP2307
Authors: Oded Galor; Omer Moav
Abstract: This paper presents a unified theory that provides an intertemporal reconciliation between conflicting viewpoints about the effect of inequality on economic growth. It argues that the replacement of physical capital accumulation by human capital accumulation as a prime engine of economic growth has changed the qualitative impact of inequality on the process of development. In early stages of industrialization as physical capital accumulation is a prime source of economic growth, inequality enhances the process of development by channeling resources towards individuals whose marginal propensity to save is higher. In later stages of development, however, as the return to human capital increases due to capital-skill complementarity, human capital becomes the prime engine of growth and equality, given credit constraints, stimulating investment in human capital and economic growth. As wages increase, however, credit constraints become less binding and the overall effect of inequality becomes insignificant.
Keywords: income distributions; growth; credit constraints; human capital
JEL Codes: O11; O15; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Income Inequality (D31) | Economic Growth (O49) |
| Income Inequality (D31) | Physical Capital Accumulation (E22) |
| Physical Capital Accumulation (E22) | Economic Growth (O49) |
| Income Inequality (D31) | Human Capital Accumulation (J24) |
| Human Capital Accumulation (J24) | Economic Growth (O49) |
| Income Inequality (D31) | Investment in Human Capital (J24) |
| Credit Constraints (E51) | Human Capital Accumulation (J24) |