Inequality Overhang

IMF Working Paper No. WP/17/76

27 Pages Posted: 13 May 2017

See all articles by Francesco Grigoli

Francesco Grigoli

International Monetary Fund (IMF)

Adrian Robles

International Monetary Fund (IMF)

Date Written: March 28, 2017

Abstract

The linearity of the relationship between income inequality and economic development has been long questioned. While theory provides arguments for which the shape of relationship may be positive for low levels of inequality and negative for high ones, most of the empirical literature assumes a linear specification finding conflicting results. Employing an innovative empirical approach robust to endogeneity, we find pervasive evidence of nonlinearities. In particular, similar to the debt overhang literature, we identify an inequality overhang level in that the slope of the relationship between income inequality and economic development switches from positive to negative at a net Gini of about 27 percent. We also find that in an environment characterized by widespread financial inclusion and high income concentration, rising income inequality has a larger negative impact on economic development because banks may curtail credit to customers at the lower end of the income distribution. On the positive side, a sufficiently high female labor participation can act as a shock absorber reducing such negative impact, possibly through a more efficient allocation of resources.

Keywords: Heterogeneity, Gini, Income Distribution, Income Inequality, Income Levels, Growth, Nonlinearities

JEL Classification: E15, O15, O40

Suggested Citation

Grigoli, Francesco and Robles, Adrian, Inequality Overhang (March 28, 2017). IMF Working Paper No. WP/17/76. Available at SSRN: https://ssrn.com/abstract=2953553 or http://dx.doi.org/10.2139/ssrn.2953553

Francesco Grigoli (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Adrian Robles

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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