Inequality, Growth and the Environment: A Steady-State Analysis of the Kuznets Curve and the Environmental Kuznets Curve

Abstract

The literature on the Kuznets curve and that on the environmental Kuznets curve share several features. The analogy between the two curves concerns not only their shape, but also the theoretical explanations underlying them and the methodology used in the empirical studies. Although the evidence in favor of the curves is not clear-cut, both relationships are the object of a long-lasting debate in the literature for their large policy implications. This works intends to contribute to such debate by investigating what might happen in equilibrium if we assume that both relationships apply. In particular, taking the two curves as stylized facts of the economy, this paper examines possible implications of these empirical regularities on the steady-state equilibrium of the economy. Using a very simple infinite-horizon representative agent model a la Ramsey, we show that three possible outcomes can occur: no steady-state, a unique locally unstable steady-state, and multiple steady-states, with only the high consumption steady-state being locally stable. When a steady-state does exist, stability analysis suggests that inequality across countries may tend to increase.

JEL Classification: C62, O13, O15