Skip to main content Accessibility help
×
Hostname: page-component-586b7cd67f-2brh9 Total loading time: 0 Render date: 2024-11-25T18:58:20.723Z Has data issue: false hasContentIssue false

10 - Economic Growth and Income Inequality: Insights from the Representative Consumer Theory of Distribution

from Part V - Special Topics on Economic Growth

Published online by Cambridge University Press:  21 October 2021

John W. Diamond
Affiliation:
Rice University, Houston
George R. Zodrow
Affiliation:
Rice University, Houston
Get access

Summary

This chapter discusses the representative consumer theory of distribution (RCTD), highlighting the insights it offers into the growth–inequality relationship. It begins by embedding the RCTD in a basic Ramsey growth model, which presents its equilibrium structure in the most transparent manner. It then extends the analysis to include: (i) fiscal instruments; (ii) distribution of abilities across agents; (iii) a progressive tax structure; (iv) accumulation of human capital; and (v) public investment. The tradeoffs between inequality and other aggregates, both concurrent and over time, are stressed. RCTD introduces path dependence into the evolution of wealth and income inequality. Finally, while the tractability of RCTD makes it appealing and may provide many useful insights, it is based on strong assumptions adopted in much of contemporary macrodynamics. To understand the nature of the growth–inequality relationship, one needs to embed it within a consistently specified general equilibrium growth model, recognizing that different frameworks offer different perspectives and may lead to different conclusions.

Type
Chapter
Information
Publisher: Cambridge University Press
Print publication year: 2021

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Abramovitz, Moses, and David, Paul A., 2000. “American Macroeconomic Growth in the Era of Knowledge-Based Progress: The Long-Run Perspective.” In Engerman, Stanley L. and Gallman, Robert E. (eds.), The Cambridge Economic History of the United States. Cambridge University Press, New York, NY.Google Scholar
Agénor, Pierre-Richard, 2011. Public Capital, Growth and Welfare: Analytical Foundations for Public Policy. Princeton University Press, Princeton, NJ.Google Scholar
Aghion, Phillippe, Caroli, Eve, and García-Peñalosa, Cecilia, 1999. “Inequality and Economic Growth: The Perspective of the New Growth Theories.Journal of Economic Literature 37 (4), 1615–60.Google Scholar
Alesina, Alberto, and Rodrik, Dani, 1994. “Distributive Politics and Economic Growth.Quarterly Journal of Economics 109 (4), 465–90.Google Scholar
Algan, Yann, Cheron, Arnaud, Hairault, Jean-Olivier, and Langot, Francois, 2003. “Wealth Effect on Labor Market Transitions.Review of Economic Dynamics 6 (1), 156–78.Google Scholar
Anand, Sudhir, and Kanbur, Sanjiv M. Ravi, 1993. “The Kuznets Process and the Inequality-Development Relationship.Journal of Development Economics 40 (1), 2552.Google Scholar
Arrow, Kenneth J., and Kurz, Mordecai, 1970. Public Investment, the Rate of Return and Optimal Fiscal Policy. Johns Hopkins University Press, Baltimore, MD.Google Scholar
Artadi, Elsa V., and Sala-i-Martin, Xavier, 2003. “The Economic Tragedy of the XXth Century: Growth in Africa.” NBER Working Paper 9865. National Bureau of Economic Research, Cambridge, MA.CrossRefGoogle Scholar
Atkinson, Anthony B., 1970. “On the Measurement of Inequality.Journal of Economic Theory 2 (3), 244–63.Google Scholar
Atkinson, Anthony B., 1971. “The Distribution of Wealth and the Individual Life Cycle.Oxford Economic Papers 23 (2), 239–54.CrossRefGoogle Scholar
Atkinson, Anthony B., 1999. “The Distribution of Income in the UK and OECD Countries in the Twentieth Century.Oxford Review of Economic Policy 15 (4), 5675.Google Scholar
Atkinson, Anthony B., 2003. “Income Inequality in OECD Countries: Data and Explanations.CESifo Economic Studies 49 (4), 479513.Google Scholar
Atkinson, Anthony B., Piketty, Thomas, and Saez, Emmanuel, 2011. “Top Incomes in the Long Run of History.Journal of Economic Literature 49 (1), 371.Google Scholar
Atolia, Manoj, Chatterjee, Santanu, and Turnovsky, Stephen J., 2012. “Growth and Inequality: Dependence on the Time Path of Productivity Increases (and Other Structural Changes).Journal of Economic Dynamics and Control 36 (3), 331–48.CrossRefGoogle Scholar
Autor, David H., Katz, Lawrence F., and Krueger, Alan B., 1998. “Computing Inequality: Have Computers Changed the Labor Market?Quarterly Journal of Economics 113 (4), 1169–213.CrossRefGoogle Scholar
Banerjee, Abhijit V., and Newman, Andrew, 1993. “Occupational Choice and the Process of Development.Journal of Political Economy 101 (2), 274–98.Google Scholar
Banerjee, Abhijit V., and Somanathan, Rohini, 2007. “The Political Economy of Public Goods: Some Evidence from India.Journal of Development Economics 82 (2), 287314.Google Scholar
Barro, Robert J., 1990Government Spending in a Simple Model of Endogenous Growth.Journal of Political Economy 98 (5), S103–25.CrossRefGoogle Scholar
Barro, Robert J., 2000. “Inequality and Growth in a Panel of Countries.Journal of Economic Growth 5 (1), 532.Google Scholar
Becker, Gary S., 1964. Human Capital. Columbia University Press, New York, NY.Google Scholar
Becker, Gary S., and Barro, Robert J., 1988. “A Reformulation of the Economic Theory of Fertility.Quarterly Journal of Economics 103 (1), 125.CrossRefGoogle ScholarPubMed
Becker, Gary S., and Tomes, Nigel, 1979. “An Equilibrium Theory of the Distribution of Income and Intergenerational Mobility.Journal of Political Economy 87 (6), 1153–89.CrossRefGoogle Scholar
Becker, Robert A., 1980. “On the Long-Run Steady State in a Simple Dynamic Model of Equilibrium with Heterogeneous Households.Quarterly Journal of Economics 95 (2), 375–82.Google Scholar
Becker, Robert A., 2006. “Equilibrium Dynamics with Many Agents.” In Dana, Rose-Anne, Le Van, Cuong, Mitra, Tapan, and Nishimura, Kazuo (eds.), Handbook of Optimal Growth, 385442. Springer, Heidelberg, Germany.Google Scholar
Bénabou, Roland, 1996a. “Equity and Efficiency in Human Capital Investment: The Local Connection.Review of Economic Studies 63 (2), 237–64.Google Scholar
Bénabou, Roland, 1996b. “Inequality and Growth.” In Bernanke, Ben S. and Rotemberg, Julio J. (eds.), Macroeconomic Annual 1996. National Bureau of Economic Research, MIT Press, Cambridge, MA.Google Scholar
Benhabib, Jess, Bisin, Alberto, and Zhu, Shenghao, 2015. “The Wealth Distribution in Bewley Economies with Capital Income Risk.Journal of Economic Theory 159 (PA), 489515.CrossRefGoogle Scholar
Bewley, Truman F., 1977. “The Permanent Income Hypothesis: A Theoretical Formulation.Journal of Economic Theory 16 (2), 252–92.Google Scholar
Bewley, Truman F., 1982. “An Integration of Equilibrium Theory and Turnpike Theory.Journal of Mathematical Economics 10 (2–3), 233–67.CrossRefGoogle Scholar
Blomquist, Sören, 1983. “The Effect of Income Taxation on the Labor Supply of Married Men in Sweden.Journal of Public Economics 22 (2), 169–97.Google Scholar
Blomquist, Sören, Eklöf, Matias, and Newey, Whitney, 2001. “Tax Reform Evaluation Using Non-parametric Methods: Sweden 1980–1991.Journal of Public Economics 79 (3), 543–68.Google Scholar
Bom, Pedro, and Ligthart, Jenny, 2014. “What Have We Learned from Three Decades of Research on the Productivity of Public Capital?Journal of Economic Surveys 28 (5), 889916.Google Scholar
Bourguignon, François, 1979. “Decomposable Income Inequality Measures.Econometrica 47 (4), 901–20.Google Scholar
Brakman, Steven, Garretsen, Harry, and van Marrewijk, Charles, 2002. “Locational Competition and Agglomeration: The Role of Government Spending.” CESifo Working Paper 775. CESifo, Munich, Germany.CrossRefGoogle Scholar
Brueckner, Markus, and Lederman, Daniel, 2018. “Inequality and Economic Growth: The Role of Initial Income.Journal of Economic Growth 23 (3), 341–66.Google Scholar
Calderón, César, and Servén, Luis, 2004. “The Effects of Infrastructure Development on Growth and Income Distribution.” Policy Research Paper No. 3400. World Bank, Washington, DC.Google Scholar
Calderón, César, and Servén, Luis, 2010. “Infrastructure and Economic Development in Sub-Saharan Africa.Journal of African Economies 19 (S1), 1387.Google Scholar
Calderón, César, and Servén, Luis, 2014. “Infrastructure, Growth, and Inequality: An Overview.” Policy Research Paper No. 7034. World Bank, Washington, DC.Google Scholar
Caselli, Francesco, and Ventura, Jaume, 2000. “A Representative Consumer Theory of Distribution.American Economic Review 90 (4), 909–26.CrossRefGoogle Scholar
Castañeda, Ana, Díaz‐Giménez, Javier, and Ríos‐Rull, José‐Víctor, 1998. “Exploring the Income Distribution Business Cycle Dynamics.Journal of Monetary Economics 42 (1), 93130.Google Scholar
Chatterjee, Satyajit, 1994. “Transitional Dynamics and the Distribution of Wealth in a Neoclassical Growth Model.Journal of Public Economics 54 (1), 97119.Google Scholar
Chatterjee, Santanu, and Turnovsky, Stephen J., 2012. “Infrastructure and Inequality.European Economic Review 56 (8), 1730–45.Google Scholar
Checchi, Daniele, and García-Peñalosa, Cecilia, 2010. “Labour Market Institutions and the Personal Distribution of Income in the OECD.Economica 77 (307), 413–50.Google Scholar
Cheng, Ing-Haw, and French, Eric, 2000. “The Effect of the Run-Up in the Stock Market on Labor Supply.Federal Reserve Bank of Chicago Economic Perspectives 24 (4), 4865.Google Scholar
Coronado, Julia Lynn, and Perozek, Maria, 2003. “Wealth Effects and the Consumption of Leisure: Retirement Decisions During the Stock Market Boom of the 1990s.” Finance and Economics Discussion Series, 2003–20. Board of Governors of the Federal Reserve System, Washington, DC.Google Scholar
De la Croix, David, and Doepke, Matthias, 2003. “Inequality and Growth: Why Differential Fertility Matters.American Economic Review 93 (4), 10911193.CrossRefGoogle Scholar
Durlauf, Steven N., 1996. “A Theory of Persistent Income Inequality.Journal of Economic Growth 1 (1), 7594.Google Scholar
Eden, Maya, and Kraay, Aart, 2014. “‘Crowding In’ and the Returns to Government Investment in Low-Income Countries.” Policy Research Working Paper Series 6781. World Bank, Washington, DC.Google Scholar
Ehrlich, Isaac, 2008. “The Mystery of Human Capital and Engine of Growth, or Why the US Became the Economic Superpower in the 20th Century.” In Smith, Barry, Mark, David M., and Ehrlich, Isaac (eds.), The Mystery of Human Capital and the Construction of Social Reality, 113–58. Open Court, Chicago, IL.Google Scholar
Ehrlich, Isaac, and Kim, Jinyoung, 2007. “The Evolution of Income and Fertility Inequalities over the Course of Economic Development: A Human Capital Perspective.Journal of Human Capital 1 (1), 137–74.Google Scholar
Fan, Shenggen, and Zhang, Xiaobo, 2004. “Infrastructure and Regional Economic Development in Rural China.China Economic Review 15 (2), 203–14.CrossRefGoogle Scholar
Fernandez, Raquel, and Rogerson, Richard, 1996. “Income Distribution, Communities, and the Quality of Public Education.Quarterly Journal of Economics 111 (1), 135–64.Google Scholar
Ferranti, David, Perry, Guillermo, Ferreira, Francisco, and Walton, Michael, 2004. Inequality in Latin America: Breaking with History? World Bank, Washington, DC.CrossRefGoogle Scholar
Forbes, Kristen J., 2000. “A Reassessment of the Relationship between Inequality and Growth.American Economic Review 90 (4), 869–87.Google Scholar
Futagami, Koichi, Morita, Yuichi, and Shibata, Akihisa, 1993. “Dynamic Analysis of an Endogenous Growth Model with Public Capital.Scandinavian Journal of Economics 95 (4), 607–25.Google Scholar
Galor, Oded, 2011. Unified Growth Theory. Princeton University Press, Princeton, NJ.Google Scholar
Galor, Oded, and Moav, Omer, 2004. “From Physical to Human Capital Accumulation: Inequality and the Process of Development.Review of Economic Studies 71 (4), 1001–26.Google Scholar
Galor, Oded, and Tsiddon, Daniel, 1997. “Technological Progress, Mobility, and Economic Growth.American Economic Review 87 (3), 363–82.Google Scholar
Galor, Oded, and Weil, David N., 2000. “Population, Technology, and Growth: From Malthusian Stagnation to the Demographic Transition and Beyond.American Economic Review 90 (4), 806–28.Google Scholar
Galor, Oded, and Zeira, Joseph, 1993. “Income Distribution and Macroeconomics.Review of Economic Studies 60 (1), 3552.Google Scholar
García-Peñalosa, Cecilia, and Turnovsky, Stephen J., 2011. “Taxation and Income Distribution Dynamics in a Neoclassical Growth Model.Journal of Money, Credit, and Banking 43 (8), 1543–77.CrossRefGoogle Scholar
García-Peñalosa, Cecilia, and Turnovsky, Stephen J., 2015. “Income Inequality, Mobility, and the Accumulation of Capital.Macroeconomic Dynamics 19 (6), 1332–57.CrossRefGoogle Scholar
Getachew, Yoseph Y., and Turnovsky, Stephen J., 2015. “Productive Government Spending and Its Consequences for the Growth-Inequality Tradeoff.Research in Economics 69 (4), 621–40.Google Scholar
Glomm, Gerhard, and Ravikumar, B, 1992. “Public versus Private Investment in Human Capital: Endogenous Growth and Income Inequality.Journal of Political Economy 100 (4), 818–34.Google Scholar
Glomm, Gerhard, and Ravikumar, B, 1994. “Public Investment in Infrastructure in a Simple Growth Model.Journal of Economic Dynamics and Control 18 (6), 1173–87.Google Scholar
Goldin, Claudia, and Katz, Lawrence F., 1999. “The Returns to Skill across the Twentieth Century United States.” NBER Working Paper No. 7126. National Bureau of Economic Research, Cambridge, MA.Google Scholar
Goldin, Claudia, and Katz, Lawrence F., 2001. “The Legacy of U.S. Educational Leadership: Notes on Distribution and Economic Growth in the 20th Century.American Economic Review Papers and Proceedings 91 (2), 1823.Google Scholar
Goldin, Claudia, and Katz, Lawrence F., 2008. The Race between Education and Technology. Harvard University Press, Cambridge, MA.Google Scholar
Gorman, William M., 1959. “Separable Utility and Aggregation.Econometrica 27 (3), 469–81.Google Scholar
Guo, Jang-Ting, and Lansing, Kevin J., 1998. “Indeterminacy and Stabilization Policy.Journal of Economic Theory 82 (2), 481–90.Google Scholar
Hausman, Jerry A., 1981. “Labor Supply.” In Aaron, Henry J. and Pechman, Joseph A. (eds.), How Taxes Affect Economic Behavior, 2771. Brookings Institution, Washington, DC.Google Scholar
He, Hui, 2012. “What Drives the Skill Premium: Technological Change or Demographic Variation?European Economic Review 56 (8), 1546–72.Google Scholar
Heathcote, Jonathan, Storesletten, Kjetil, and Violante, Giovanni L., 2009. “Quantitative Macroeconomics with Heterogeneous Households.Annual Review of Economics 1 (1), 319–54.Google Scholar
Holtz-Eakin, Douglas, Joulfaian, David, and Rosen, Harvey S., 1993. “The Carnegie Conjecture: Some Empirical Evidence.Quarterly Journal of Economics 108 (2), 413–35.Google Scholar
Jorgensen, Dale W., Ho, Mun S., and Stiroh, Kevin J., 2005. “Projecting Productivity Growth: Lessons from the US Growth Resurgence.” In Dutton, William H., Kahin, Brian, O’Callaghan, Ramon, and Wyckoff, Andrew W. (eds.), The Economic and Social Implications of Information Technology. MIT Press, Cambridge, MA.Google Scholar
Katz, Lawrence F., and Murphy, Kevin M., 1992. “Changes in Relative Wages, 1963–1987: Supply and Demand Factors.Quarterly Journal of Economics 107 (1), 3578.Google Scholar
Koyuncu, Murat, and Turnovsky, Stephen J., 2016. “The Dynamics of Growth and Income Inequality under Progressive Taxation.Journal of Public Economic Theory 18 (6), 560–88.Google Scholar
Kraay, Aart, 2016. “Weak Instruments in Growth Regressions.” Policy Research Working Paper 7494. World Bank, Washington, DC.Google Scholar
Krusell, Per, Ohanian, Lee E., Rios-Rull, José-Víctor, and Violante, Giovanni L., 2000. “Capital-Skill Complementarity and Inequality: A Macroeconomic Analysis.Econometrica 68 (5), 1029–53.CrossRefGoogle Scholar
Krusell, Per, and Smith, Anthony A., 1998. “Income and Wealth Heterogeneity in the Macroeconomy.Journal of Political Economy 106 (5), 867–96.Google Scholar
Kuznets, Simon, 1955. “Economic Growth and Income Inequality.American Economic Review 45 (1), 128.Google Scholar
Li, Hongyi, and Zou, Heng-Fu, 1998. “Income Inequality Is Not Harmful to Growth: Theory and Evidence.Review of Development Economics 2 (3), 318–34.CrossRefGoogle Scholar
Li, Wenli, and Sarte, Pierre-Daniel G, 2004. “Progressive Taxation and Long-Run Growth.American Economic Review 94 (5), 1705–16.Google Scholar
Lopez, Humberto, 2004. “Macroeconomics and Inequality.” Research Workshop: Macroeconomic Challenges in Low Income Countries. International Monetary Fund, Washington, DC.Google Scholar
Lucas, Robert E., 1988. “On the Mechanics of Economic Development.Journal of Monetary Economics 22 (1), 342.Google Scholar
Maliar, Lilia, and Maliar, Serguei, 2001. “Heterogeneity in Capital and Skills in a Neoclassical Stochastic Growth Model.Journal of Economic Dynamics and Control 25 (9), 1367–97.CrossRefGoogle Scholar
Maliar, Lilia, and Maliar, Serguei, 2003. “The Representative Consumer in the Neoclassical Growth Model with Idiosyncratic Shocks.Review of Economic Dynamics 6 (2), 362–80.Google Scholar
McDaniel, Cara, 2007. “Average Tax Rates on Consumption, Investment, Labor and Capital in the OECD 1953–2003.” Working Paper. Arizona State University, Tempe, AZ.Google Scholar
Mendoza, Enrique G., Razin, Assaf, and Tesar, Linda, 1994. “Effective Tax Rates in Macroeconomics: Cross Country Estimates of Tax Rates on Factor Incomes and Consumption.Journal of Monetary Economics 34 (3), 297323.Google Scholar
Perotti, Roberto, 1996. “Growth, Income Distribution, and Democracy: What the Data Say.Journal of Economic Growth 1 (2), 149–87.CrossRefGoogle Scholar
Persson, Torsten, and Tabellini, Guido, 1994. “Is Inequality Harmful for Growth?American Economic Review 84 (3), 600–21.Google Scholar
Piketty, Thomas, 2011. “On the Long-Run Evolution of Inheritance: France 1820–2050.Quarterly Journal of Economics 126 (3), 10711131.Google Scholar
Piketty, Thomas, 2014. Capital in the Twenty-First Century. Harvard University Press, Cambridge, MA.Google Scholar
Piketty, Thomas, and Saez, Emmanuel, 2003. “Income Inequality in the United States, 1913–1998.Quarterly Journal of Economics 118 (1), 139.Google Scholar
Piketty, Thomas, and Zucman, Gabriel, 2014, “Capital Is Back: Wealth-Income Ratios in Rich Countries 1700–2010.Quarterly Journal of Economics 129 (3), 12551310.Google Scholar
Ramsey, Frank P., 1928. “A Mathematical Theory of Saving.Economic Journal 38 (152), 543–59.Google Scholar
Saint-Paul, Gilles, and Verdier, Thierry, 1993. “Education, Democracy, and Growth.Journal of Development Economics 42 (2), 399407.Google Scholar
Sarte, Pierre-Daniel G., 1997. “Progressive Taxation and Income Inequality in Dynamic Competitive Equilibrium.Journal of Public Economics 66 (1), 145–71.Google Scholar
Schultz, Theodore W., 1963. The Economic Value of Education. Columbia University Press, New York, NY.Google Scholar
Seneviratne, Dulani, and Sun, Yan, 2013. “Infrastructure and Income Distribution in ASEAN-5: What Are the Links?” IMF Working Paper 13/41. International Monetary Fund, Washington, DC.Google Scholar
Sorger, Gerhard, 2000. “Income and Wealth Distribution in a Simple Growth Model.Journal of Economic Theory 16 (1), 2342.Google Scholar
Sorger, Gerhard, 2002. “On the Long-Run Distribution of Capital in the Ramsey Model.Journal of Economic Theory 105 (1), 226–43.CrossRefGoogle Scholar
Turnovsky, Stephen J., 2015. “Economic Growth and Inequality: The Role of Public Investment.Journal of Economic Dynamics and Control 61 (December), 204–21.Google Scholar
Turnovsky, Stephen J., and García-Peñalosa, Cecilia, 2008. “Distributional Dynamics in a Neoclassical Growth Model: The Role of Elastic Labor Supply.Journal of Economic Dynamics and Control 32 (5), 13991431.Google Scholar
Turnovsky, Stephen J., and Mitra, Aditi, 2013. “The Interaction between Human and Physical Capital Accumulation and the Growth-Inequality Tradeoff.Journal of Human Capital 7 (1), 2675.Google Scholar
Turnovsky, Stephen J., and Rojas-Vallejos, Jorge, 2018. “The Distributional Consequences of Trade Liberalization: Consumption Tariff versus Investment Tariff Reduction.Journal of Development Economics 134 (September), 392415.Google Scholar
Voichovsky, Sarah, 2005. “Does the Profile of Income Inequality Matter for Economic Growth?Journal of Economic Growth 10 (3), 273–96.Google Scholar
World Bank, 2006. “Inclusive Growth and Service Delivery: Building on India’s Success.” World Bank Development Policy Review Report No. 34580-IN. World Bank, Washington, DC.Google Scholar

Save book to Kindle

To save this book to your Kindle, first ensure [email protected] is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about saving to your Kindle.

Note you can select to save to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be saved to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

Available formats
×

Save book to Dropbox

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Dropbox.

Available formats
×

Save book to Google Drive

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Google Drive.

Available formats
×