Working Paper: NBER ID: w3599
Authors: Torsten Persson; Guido Tabellini
Abstract: Is inequality harmful for growth? We suggest that it is. To summarize our main argument: in a society where distributional conflict is more important, political decisions are more likely to produce economic policies that allow private individuals to appropriate less of the returns to growth promoting activities, such as accumulation of capital and productive knowledge. In the paper we first formulate a theoretical model that formally captures this idea. The model has a politico-economic equilibrium, which determines a sequence of growth rates depending on structural parameters, political institutions, and initial conditions. We then confront the testable empirical implications with two sets of data. A first data set pools historical evidence-which goes back to the mid 19th century-from the US and eight European countries. A second data set contains post-war evidence from a broad cross-section of developed and less developed countries. In both samples we find a statistically significant and quantitatively important negative relation between inequality and growth. After a comprehensive sensitivity analysis, we conclude that our findings are not distorted by measurement error, reverse causation, hetroskedasticity, or other econometric problems.
Keywords: inequality; growth; political economy; endogenous growth
JEL Codes: O40; D63
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) |
| distributional conflict (D74) | economic growth (O49) |
| political decisions (D72) | accumulation of capital (E22) |
| accumulation of capital (E22) | economic growth (O49) |
| initial conditions (C62) | economic growth (O49) |