The Impact of Inequality and Redistribution on Growth

25 Pages Posted: 11 May 2019

Date Written: June 2019

Abstract

In this paper, we reassess the impact of inequality on growth. The majority of previous papers have employed (system) GMM estimation. However, recent simulation studies indicate that the problems of GMM when using non‐stationary data such as GDP have been grossly underestimated in applied research. Concerning predetermined regressors such as inequality, GMM is outperformed by a simple least‐squares dummy variable estimator. Additionally, new data have recently become available that not only double the sample size compared to most previous studies, but also address the substantial measurement issues that have plagued past research. Using these new data and an LSDV estimator, we provide an analysis that both accounts for the conditions where inequality is beneficial or detrimental to growth and distinguishes between market‐driven inequality and redistribution. We show that there are situations where market inequality affects growth positively while redistribution is simultaneously beneficial.

Keywords: inequality, growth, redistribution, education

Suggested Citation

El-Shagi, Makram and Shao, Liang, The Impact of Inequality and Redistribution on Growth (June 2019). Review of Income and Wealth, Vol. 65, Issue 2, pp. 239-263, 2019. Available at SSRN: https://ssrn.com/abstract=3385027 or http://dx.doi.org/10.1111/roiw.12342

Makram El-Shagi (Contact Author)

Henan University ( email )

85 Minglun St. Shunhe
Kaifeng, CA Henan 475001
China

Liang Shao

Henan University

85 Minglun St. Shunhe
Kaifeng, CA Henan 475001
China

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