Income Inequality, Government Expenditure, and Economic Growth: Theory and Empirics

39 Pages Posted: 12 Jun 2010

See all articles by Hua Cao

Hua Cao

Nankai University - School of Economics

Xiaofeng Liu

Nankai University - School of Economics

Date Written: June 11, 2008

Abstract

To explain the relationship between income inequality and economic growth, we develop a computational model of endogenous growth by taking the effects of fixed government expenditure into account. With such a model, a non-linear relationship between level of income inequality and economic growth rate is identified and shown to be consistent with empirical findings reported in the literature. This relationship can be either positive or negative, depending on per capita GDP. In fact, there exists a threshold level for per capita GDP. If the per capita GDP is above this threshold, income inequality facilitates economic growth; otherwise, it hurts economic growth. The threshold point is jointly determined by income inequality level and per capita GDP. Furthermore, our model indicates that there exists a positive relation between income inequality level and per capita GDP on these threshold points. Using cross-country data, we empirically verify this relationship from the computational model. Sensitivity analysis is performed to show the robustness of our results.

Keywords: Income inequality, economic growth, government expenditure, majority voting, basic tax rate

JEL Classification: E40, O42, D60

Suggested Citation

Cao, Hua and Liu, Xiaofeng, Income Inequality, Government Expenditure, and Economic Growth: Theory and Empirics (June 11, 2008). Available at SSRN: https://ssrn.com/abstract=1623815 or http://dx.doi.org/10.2139/ssrn.1623815

Hua Cao

Nankai University - School of Economics ( email )

Wenjin Road
Tianjin, TianJin 300071
China

Xiaofeng Liu (Contact Author)

Nankai University - School of Economics ( email )

Wenjin Road
Tianjin, TianJin 300071
China

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