Why Low Inequality Spurs Growth: Savings and Investment by the Poor

22 Pages Posted: 20 Apr 2011

See all articles by Nancy Birdsall

Nancy Birdsall

Center for Global Development

Thomas C. Pinckney

affiliation not provided to SSRN

Richard Sabot

Williams College - Department of Economics

Date Written: August 1996

Abstract

New empirical evidence suggests that high levels of income inequality constrain rather than encourage growth. While some explanations involve relationships between inequality and political systems, this paper focuses on the microeconomic behavior of poor households. When returns to labor are sufficiently high, poor households can intensify their work effort to generate additional income that in turn provides funds for high-return investments; under these circumstances the marginal propensity to save from this additional income may be exceptionally high. Increased savings and investment among the poor can, in turn, simultaneously reduce poverty and income inequality and stimulate growth. The model developed in this paper is applied to human capital investment in Brazil and Korea from 1960 to 1990.

Suggested Citation

Birdsall, Nancy and Pinckney, Thomas C. and Sabot, Richard, Why Low Inequality Spurs Growth: Savings and Investment by the Poor (August 1996). IDB Working Paper No. 270. Available at SSRN: https://ssrn.com/abstract=1815957 or http://dx.doi.org/10.2139/ssrn.1815957

Nancy Birdsall (Contact Author)

Center for Global Development ( email )

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Thomas C. Pinckney

affiliation not provided to SSRN

No Address Available

Richard Sabot

Williams College - Department of Economics ( email )

Fernald House
Williamstown, MA 01267
United States

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