Inequality, Redistribution and Growth

Abstract

This paper analyzes the political economy of redistribution between two income groups in a dynamic economy and provides theoretical linkages between lobbying activities, income distribution and growth. It explains why the relationship between redistribution and growth is non-monotonic. Moreover, it is shown that in the presence of investment indivisibilities in human capital and missing capital markets, both the pressure for redistribution and the initial wealth distribution affect economic growth. Persistence in inequality prevails when the political pressure by the low-skilled to increase redistribution is blocked by the lobby for lower taxes by the skilled, allowing for multiple steady-state equilibria. The resulting relationships are explored both theoretically and quantitatively.

Keywords: Inequality, redistribution, economic growth, taxation, political economy, lobbying

JEL Classification: D30, D72, H23, O40