Wealth Varying Savings, Inequality and Growth
Posted: 25 Sep 1998
Date Written: May 1998
Recent studies (Galor and Zeira (1993), Banerjee and Newman (1993)) argue that, because of capital market imperfections, income inequality leads to inefficiencies which impede economic growth. By contrast, Keynes believed that since the rich save at a higher rate than the poor, income inequality stimulates growth by increasing aggregate savings. We trace the interaction of these two seemingly conflicting lines of reasoning, analyzing the effects of income distribution on growth in a model that explicitly accounts for the dynamic interaction between capital accumulation, interest rates and wages, wealth redistribution, social mobility and economic development. We find that the efficiency effects of income distribution identified in the contemporary literature affect long run growth only under the Keynesian assumption, that the poor and rich save at different rates. When the poor and the rich save at the same rate, income equality is irrelevant for long run growth (in analogy to Aghion and Bolton (1997)). Thus, paradoxically, the efficiency effects of income equality can keep society from entering a poverty trap precisely under the behavioral assumption to which Keynes appealed to "justify" the concentration of wealth.
JEL Classification: E21
Suggested Citation: Suggested Citation