From Physical to Human Capital Accumulation: Inequality in the Process of Development

Brown University Working Paper No. 99-27

37 Pages Posted: 14 Nov 2000

See all articles by Oded Galor

Oded Galor

Brown University - Department of Economics; Centre for Economic Policy Research (CEPR)

Omer Moav

University of Warwick - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: February 11, 2002

Abstract

This paper develops a unified theory for the dynamic implications of income inequality on the process of development. The proposed theory argues that the replacement of physical capital accumulation by human capital accumulation as a prime engine of economic growth has changed the qualitative impact of inequality on the process of development. In early stages of industrialization as physical capital accumulation is a prime source of economic growth, inequality enhances the process of development by channeling resources towards individuals whose marginal propensity to save is higher. In later stages of development, however, as the return to human capital increases due to capital-skill complementarity, human capital becomes the prime engine of growth and equality, in the presence of credit constraints, stimulates investment in human capital and promotes economic growth. As wages increase, however, credit constraints become less binding, differences in the marginal propensity to save decline and the aggregate effect of income distribution on the growth process becomes therefore less significant.

Keywords: Income Distributions, Growth, Credit Constraints, Human Capital

JEL Classification: O11, O15, O40

Suggested Citation

Galor, Oded and Moav, Omer, From Physical to Human Capital Accumulation: Inequality in the Process of Development (February 11, 2002). Brown University Working Paper No. 99-27. Available at SSRN: https://ssrn.com/abstract=249868 or http://dx.doi.org/10.2139/ssrn.249868

Oded Galor

Brown University - Department of Economics ( email )

Providence, RI 02912
United States

HOME PAGE: http://www.econ.brown.edu/fac/Oded_Galor/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

HOME PAGE: http://www.econ.brown.edu/fac/Oded_Galor/

Omer Moav (Contact Author)

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom

HOME PAGE: http://www2.warwick.ac.uk/fac/soc/economics/staff/academic/moav

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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