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Wealth inequality, entrepreneurship, and aggregate output: a tale of two centuries in the UK

Published online by Cambridge University Press:  17 February 2025

Xiaoliang Yang Open the ORCID record for Xiaoliang Yang [Opens in a new window] ,
Peng Zhou Open the ORCID record for Peng Zhou [Opens in a new window]  and
Xue Dong Open the ORCID record for Xue Dong [Opens in a new window]
Xiaoliang Yang
Affiliation:
School of Public Finance and Taxation, Zhongnan University of Economics and Law, Wuhan, China Center for International Cooperation and Disciplinary Innovation of Income Distribution and Public Finance (111 Center), Zhongnan University, Wuhan, China
Peng Zhou
Affiliation:
Business School, Cardiff University, Cardiff, UK
Xue Dong*
Affiliation:
School of Economics, Zhejiang University of Finance and Economics, Hangzhou, China
*
Corresponding author: Xue Dong; Email: [email protected]
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Abstract

This paper investigates the long-run nexus between wealth inequality and aggregate output using a DSGE model in which wealth inequality endogenously affects individual entrepreneurship incentives, thereby influencing aggregate output. Our model passes the indirect inference test against the UK data from 1870 to 2015. We find that shocks to aggregate TFP, entrepreneurial barriers, government grant support and general government spending played significant roles in shaping historical inequality dynamics in the UK. Directly removing entrepreneurial barriers or indirectly providing government grant support to the private sector such as through inclusive loan subsidies are effective means of reducing inequality and stimulating output growth.

Keywords

Wealth inequalityaggregate outputentrepreneurshipindirect inferenceE10C63O40D31N30
Type
Articles
Information
Macroeconomic Dynamics , Volume 29 , 2025 , e74
Copyright
© The Author(s), 2025. Published by Cambridge University Press

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