Wealth Varying Savings, Inequality and Growth

Posted: 25 Sep 1998

See all articles by Arthur Fishman

Arthur Fishman

Bar-Ilan University - Department of Economics

Avi Simhon

Hebrew University of Jerusalem

Date Written: May 1998

Abstract

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

Fishman, Arthur and Simhon, Avi, Wealth Varying Savings, Inequality and Growth (May 1998). Available at SSRN: https://ssrn.com/abstract=114048

Arthur Fishman (Contact Author)

Bar-Ilan University - Department of Economics ( email )

Ramat-Gan, 52900
Israel
972-3-531-8366 (Phone)
972 3 535 3180 (Fax)

Avi Simhon

Hebrew University of Jerusalem ( email )

Mount Scopus
Jerusalem 91905, Jerusalem 91905
Israel
+972 2 588 3237 (Phone)
+972 2 581 6071 (Fax)

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