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Income Inequality is not Harmful for Growth: Theory and Evidence
Author(s) -
Li Hongyi,
Zou Hengfu
Publication year - 1998
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/1467-9361.00045
Subject(s) - economics , inequality , economic inequality , consumption (sociology) , contrast (vision) , growth theory , function (biology) , demographic economics , econometrics , neoclassical economics , mathematics , sociology , biology , mathematical analysis , social science , computer science , artificial intelligence , evolutionary biology
The paper shows that income inequality may theoretically lead to higher economic growth if public consumption enters the utility function. Empirically, baseline estimations and a sensitivity analysis show that income inequality is positively, and most of the time significantly, associated with economic growth. These findings stand in sharp contrast to the negative association between inequality and growth propounded by Alesina and Rodrik and by Persson and Tabellini.