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INCOME INEQUALITY AND ECONOMIC GROWTH WITH ALTRUISTIC BEQUESTS AND HUMAN CAPITAL INVESTMENT

Published online by Cambridge University Press:  14 December 2011

Stuart McDonald  and
Jie Zhang
Stuart McDonald
Affiliation:
University of Queensland
Jie Zhang*
Affiliation:
Sichuan University and National University of Singapore
*
Address correspondence to: Jie Zhang, Department of Economics, National University of Singapore, Singapore 117570; e-mail: [email protected].
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Abstract

In this paper we explore how income inequality affects growth in a dynastic family model with bequests (physical capital) and investment in human capital for children. For tractability, we abstract from factor markets and focus on household production, which is prevalent in developing countries. We explore a joint distribution of bequests and human capital and track the evolution of income distribution across generations. We show that initial inequality has a positive indirect effect on average output growth by lowering the ratio of physical to human capital, besides its standard negative direct effect. If education is mainly privately (publicly) provided, then income inequality retards (promotes) growth outside the balanced growth path. On the balanced growth path, inequality always hinders growth.

Keywords

Income InequalityHuman CapitalBequestsGrowth
Type
Articles
Information
Macroeconomic Dynamics , Volume 16 , Supplement S3 , November 2012 , pp. 331 - 354
Copyright
Copyright © Cambridge University Press 2011

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