Inequality and growth: the neglected time dimension

Abstract

Inequality affects economic performance through many mechanisms, both beneficial and harmful. Moreover, some of these mechanisms tend to set in fast while others are rather slow. The present paper (i) introduces a simple theoretical model to study how changes in inequality affect economic growth over different time horizons; (ii) empirically investigates the inequality-growth relationship, thereby relying on specifications derived from the theory. Our empirical findings are in line with the theoretical predictions: Higher inequality helps economic performance in the short term but reduces the growth rate of GDP per capita farther in the future. The long-run (or total) effect of higher inequality tends to be negative. The long-run (or total) e¤ect of higher inequality tends to be negative.JEL classi…cation: O11, O15, O43

Individualism–collectivism, governance and economic development

“…6 Ethnic heterogeneity can be pernicious for both economic development and governance (Alesina and La Ferrara 2005) and can increase the salience of in-group affiliation thus contributing towards collectivism (Schwartz 2004;Licht et al 2007). Inequality can worsen government quality (You and Khagram 2005) and can undermine long-run growth either directly (Easterly 2007) or through its effect on governance (Halter et al 2014). Moreover, collectivist societies tend to be more unequal and hierarchical (Triandis 1995).…”

Does inequality hamper long run growth? Evidence from Emerging Economies

“…The specification of the model becomes extremely important because different estimation techniques yield different results. Halter et al (2014) find a positive relationship between growth and inequality using first difference; the same relationship turns negative in middle and low income countries when system GMM is applied. The system GMM can be prefered over the first difference GMM due to the additional assumption of non-correlation between the fixed effects and the first differences of the instruments, which allows the use of greater number of instruments.…”

The Effects of Income Inequality and Redistribution in Democracies: A Dynamic Panel Data Approach

“…The null hypothesis of the joint validity of the subset of instruments cannot be rejected. The preferred specifications, the p-values on the difference-in-Hansen test are typically above 0.45 (Halter et al 2014) An additional check for the DPD estimates' validity is that the estimated coefficient of the lagged dependent variable lies between the values obtained from the OLS and WG estimations, as suggested by Bond (2002). This is confirmed by the baseline model as OLS=-0.0041>SYS-GMM= -0.0276>WG=-0.0703.…”