Income Distribution and Macroeconomics

Abstract

This paper analyzes the role of wealth distribution in macroeconomics through investment in human capital. It is shown that in the presence of credit markets' imperfections and indivisibilities in investment in human capital, the initial distribution of wealth affects aggregate output and investment both in the short and in the long run, as there are multiple steady states. This paper therefore provides an additional explanation for the persistent differences in per-capita output across countries. Furthermore, the paper shows that crosscountry differences in macroeconomic adjustment to aggregate shocks can be attributed, among other factors, to differences in wealth and income distribution across countries. 1. See Kaldor (1956), Kuznets (1955) and a later survey by Cline (1975). 35 10. There are alternative ways to model the bequest motive, but it can be shown that they yield similar results. This issue is discussed in Section 5. 11. This assumption is not critical to any of the results of the paper. Removing it can even strengthen our results. This assumption though reflects, in a somewhat extreme way, the fact that individuals are usually more credit constrained than firms.

Productive government spending and its consequences for the growth–inequality tradeoff

“…First, is the literature on public capital and endogenous growth, some of which is referred to earlier. Second, are papers studying distribution and growth with imperfect credit markets, (e.g., Loury, 1981, Galor and Zeira, 1993, Aghion and Bolton, 5 1997, Aghion, et al, 1999, Bénabou, 1996, 2000, 2002, and Seshadri and Yuki, 2004). …”

“…At the first level, the individual"s private capital and public capital, t g , are combined in accordance with the CES production function, with elasticity of substitution being 1 (1 )   . We assume that the two capital goods are cooperative in production, meaning that 0and imposes an upper bound on the degree of substitutability, 1 Galor and Zeira (1993), the general results and insights are robust with respect to variations in the specification of this class of utility function. 9 The assumption of a unitary inter-temporal elasticity of substitution utility function of altruistic agents with a "joy of giving" motive is widely used in the literature of income distribution dynamics (see, for instance, Glomm and Ravikumar, 1992, Galor and Zeira, 1993, Saint-Paul and Verdier, 1993, and Bénabou, 2000.…”

The Impact of Simple Institutions in Experimental Economies with Poverty Traps

“…There are Pareto-dominant equilibria where all of the industries operate and dominated equilibria where none operate. Galor and Zeira (1993) and Banerjee et al endowments are chosen so that the poverty trap is likely to be reached; indeed, in these baseline cases, economies never fully escape the poverty trap. Then, we add simple institutions to the baseline economy and determine whether these institutions enable economies to escape the poverty trap.…”

Income Distribution and Macroeconomics Revisited: The Role of Fertility Adjustment

“…They have explored various mechanisms to explain the negative aspects of inequality. In particular, Galor and Zeira (1993) theoretically argued that, in developed economies with imperfect capital markets, inequality retards human capital accumulation and economic growth. 1 While the subsequent studies in this line of research incorporate the fertility decisions of households (cf.…”