Political economy of income distribution dynamics

Income distribution varies considerably across countries; it tends to become more equal with development in some countries, but just the opposite occurs in other countries. This paper provides a theoretical investigation of the persistent differences in income distribution across countries over time. Motivated by the relationship between income distribution and public spending at different school levels for a broad range of countries over the past 30 years, the analysis centers on the role of public education where specific investments interact with political involvement by different socio-economic groups. Socio-economic groups may form lobbies to influence education policy making. The formation of lobbies is endogenous. Persistent inequality is caused by persistent lobbying efforts of the wealthy that lead to an allocation of public education spending more biased toward them.     

Credit market imperfections, income distribution, and capital accumulation

Summary. This paper builds a model in which the distribution of income matters for capital formation, and uses it to analyze the effects of a simple policy intended to create a more equal distribution of income on the severity of certain credit market imperfections and, through this channel, capital accumulation. A neoclassical growth model is developed in which some capital investment must be externally financed, and external finance is subject to a standard costly state verification (CSV) problem. In particular, some fraction of the population is capitalists, who have access to risky but high return capital production technologies. Successful capitalists leave bequests to their offspring, thereby permitting them to internally finance some fraction of their own investment projects. However some external finance is also required. This is provided by workers who save out of labor income. As is well known, the greater the capability of capitalists to provide internal finance, the less severe is the CSV problem. Thus bequests mitigate credit market frictions and, in that sense, promote financial market efficiency and capital accumulation. However, they also perpetrate income inequality. The structure is used to show that a policy that taxes the bequests of capitalists, and transfers the proceeds to workers, necessarily reduces the steady state capital stock. Indeed, when this effect is sufficiently strong, these redistributive tax/transfer schemes can reduce the total (wage plus transfer) incomes of workers, as well as their welfare. Thus some simple policies intended to redistribute income can be highly counterproductive.Received: June 3, 1996; revised version: February 4, 1997This revised version was published online in February 2005 with corrections to the cover date.     

Human capital distribution, growth and convergence

This paper studies the dynamic relationship between distribution and endogenous growth in an overlapping generations model with accumulation of human and physical capital. It is shown how human capital can determine a relationship between per capita growth rates and inequality in the distribution of income. Family background effects and spillovers in the transmission of human capital generate dynamics in which aggregate variables depend not only on the stock, but also on the distribution of human capital. The evolution of this distribution over time is then characterized under different assumptions on private returns and the form of the externality in the technology for human capital. Conditions for existence, uniqueness and stability of a constant growth equilibrium with a stationary distribution are derived. Increasing returns, idiosyncratic abilities and the possibility of poverty traps are explicitely characterized in a closed form solution of the equilibrium dynamics, showing the role played by technology and preferences parameters.     

Risky human capital and deferred capital income taxation

We study the structure of optimal wedges and capital taxes in a dynamic Mirrlees economy with endogenous distribution of skills. Human capital is a private, stochastic state variable that drives the skill process of each individual. Building on the findings of the labor literature, we construct a tractable life-cycle model of human capital evolution with risky investment and stochastic depreciation. In this setting, we demonstrate the optimality of (a) a human capital premium, i.e., an excess return on human capital relative to physical capital, (b) a large intertemporal wedge early in the life-cycle, and (c) a non-zero intratemporal wedge even at the top of the skill distribution at all dates except the last date in the life-cycle. The main implication for the structure of optimal linear capital taxes is the necessity of deferred taxation of physical capital. The average marginal tax rate on physical capital held in every period is zero in present value. However, expected capital tax payments do not equal zero in every period. Necessarily, agents face negative expected capital tax payments early in the life-cycle and positive expected capital tax payments late in the life-cycle.     

On income fluctuations and capital gains

We consider the infinite time horizon problem of asymptotically maximizing the expected accumulated discounted utility in a one-good production economy. The available capital in a given period is given by the production of the previous period plus a random variable. The product of the discount and interest factors is either (1) greater than or (2) equal to one. Under (1) the optimal policy exists under certain conditions and always under (2). The optimal capital sequence almost surely goes to infinity. Under (1) with conditions on the utility one almost surely reaches a capital level above which the sequence is increasing.     

Structural shifts in the dynamics of the European income distribution

This paper aims to evaluate structural shifts in the regional per capita income distribution in Europe between the periods 1980–1993 and 1993–2005. After a brief analysis of several aspects of the distribution (inequality, external shape, polarisation and spatial dependence), we focus on intra-distribution dynamics by applying a novel causative matrix model that reveals strong structural shifts. In particular, increase in relative persistence during the second period has been the major change, especially for regions around the average and those at the upper end of the income distribution.     

Revisiting human capital and aggregate income differences

We revisit human capital and development accounting. In quantifying human capital, we split it into three components; schooling (years of education), cognitive skills (as proxied by test score results), and a health indicator (for which adult survival rates are used). Our calculations are reported for a substantive cross-section of countries for the year 2000. According to our most conservative estimates, the most complete measure of human capital accounts for 19–28% of differences in output per worker across countries, but when excluding the health component this value falls to 17–22%, and further to 13–14% when only considering schooling. We present group comparisons, finding for some regions values as large as 40–50%.     

Wage–price dynamics and income distribution in a semi-structural Keynes–Goodwin model

The paper studies the role of income distribution within a medium-scale macrodynamic model built in a Keynesian and Goodwinian tradition. Combining a wage and price Phillips curve, adjustments of an inflation climate, an IS relationship determining output, Okun’s law for employment and the Taylor rule for monetary policy, a semi-structural model is obtained that incorporates the most important macroeconomic channels in a closed economy. After assessing the reasonable time series variabilities in stochastic simulations, a deeper analysis is concerned with the stabilizing and destabilizing effects of the model’s parameters, and with a structural shift in income distribution. In many details of these investigations, the distinction between a wage-led and profit-led regime becomes important.     

Effects of income distribution on household income

The paper uses a complete model of price-independent-generalized-linear Engel equations with estimable income distribution effect parameter to compute average household income for twelve mutually exclusive groups of Australian families to highlight the bias of conventional weighted mean income published by national statistical offices for welfare analysis.     

Brain drain and income distribution

In a context in which increased income inequality has raised much concern, and skilled workers move easily across countries, an important question arises: how does the brain drain affect income distribution in the source economy? We address this question and introduce two contributions to the literature on brain drain. First, we present and solve a simple stylized model to study whether and, if so, how the brain drain affects the distribution of income, in a context in which higher education is publicly financed with general taxes. Second, we explore empirically the effect of an increase in skilled emigration on income distribution. A key prediction of our theoretical model is the existence of a non-monotonic relationship between income inequality and emigration of skilled workers. Our empirical data confirm this result, showing a statistically significant inverse U-shaped form.     

Endogenous growth and income distribution

A theory of endogenous growth is based on an investment possibility function, relating the growth rate of output to the ratio of gross investment to output and the growth rate of employment as formulated originally by M. F. Scott. Consumers maximize an intertemporal utility function and producers maximize the value of the firm. The long-run rate of growth depends on consumer preferences, the exogenous growth of labor supply and the tax rate on output. The functional distribution of income is determined along with the investment ratio in the steady state. Labor market imperfections and real wage inertia induce transition processes, which are relevant for medium term growth.We are indebted to Olivier Blanchard, Casper van Ewijk, Frederick van der Ploeg, Anton van Schaik, Maurice Scott, Jacques Smulders, and two anonymous referees for their valuable comments on an earlier version. Of course, the usual disclaimer applies.     

Financial integration, capital mobility, and income convergence

Recent studies have found that capital moves 'uphill' from poor to rich countries, and brings little or no growth dividend when it does flow into poor economies. We show that Europe does not conform to this paradigm. In the European experience of financial integration, capital has flown from rich to poor countries, and such inflows have been associated with significant acceleration of income convergence. Analysing broader samples of countries, we find that 'downhill' capital flows tend to be observed above certain thresholds in institutional quality and financial integration. But Europe remains different even when allowing for such threshold effects, and its experience is similar to that of interstate flows within the United States. Our findings are consistent with the notion that financial diversification reduces countries' incentives to save in order to self-insure against specific shocks.
— Abdul Abiad, Daniel Leigh and Ashoka Mody     

Inflation and the taxation of capital income a note

Zusammenfassung In einem einfachen neoklassischen Modell hat Professor M. Feldstein gezeigt, daß die Inflation die Steuerbelastung von Kapitalerträgen erhöht und damit die Nettoertrags-rate des Sparens senkt. In der vorliegenden Note werden zuerst einige Modellannahmen Feldsteins in Frage gestellt. Insbesondere erscheinen seine langfristige Steady-state-Analyse und die Verwendung eines neoklassischen Wachstumsmodells mit investitionsunabhängiger Wachstumsrate problematisch. Mit Einschränkungen wird in Feldsteins Modell auch das Phänomen der Doppelbesteuerung (teilweise schon wegen der erwähnten Steady-state-Betrachtung) nicht adäquat erfaßt. Im letzten Abschnitt wird die Anwendbarkeit des Modells auf österreichische Verhältnisse untersucht. Das (De-facto-)Fehlen einer Kapitalzuwachssteuer und die steuerliche Investitionsförderung lassen die Auswirkungen der Inflation auf die Kapitalertragsbesteuerung in Österreich weniger dramatisch erscheinen.     

Dynamics of income distribution

In this paper, we have obtained closed-form solutions in Cass-Koopmans growth models with heterogeneous agents. The relationship between the form of the production function and the dynamics of income distribution is made explicit. We then use this relationship to determine what production structure is simultaneously consistent with facts on growth and income inequality. Our empirical findings give support to models with decreasing returns in the reproducible factor. JEL Classification: D3, O1, O4
Dans ce mémoire, les auteurs obtiennent des solutions pour des modèles de croissance à la Cass-Koopmans dans le cas où les agents sont hétérogènes. On explicite la relation entre la forme de la fonction de production et la dynamique de la répartition des revenus. On utilise alors cette relation pour déterminer quelle structure de production est arrimée aux faits connus à la fois quant à la croissance économique et à la répartition des revenus. Les résultats empiriques supportent les modèles où les rendements sur les acteurs de production reproductibles sont décroissants.     

Taxation of capital income in overlapping generations economies

Whether capital income should be taxed in overlapping generations economies is vividly discussed. It is shown that intergenerational lump‐sum taxes cannot implement the Golden Rule allocation when agents have private information on their earnings potential. Hence, the seminal Atkinson–Stiglitz result that optimal income taxation pre‐empts any role for indirect taxation cannot be interpreted to imply that capital income taxation (affecting intertemporal relative prices) should not be taxed. Specifically, capital income should unambiguously be taxed in small open economies, and the optimal tax rate depends inversely on the elasticity of total savings to disposable income and the after‐tax rate of return.     

Human capital and economic development

This paper develops a general equilibrium model of fertility and human capital investment with young adult mortality. Because young adult mortality is negatively related to average young adult human capital, human capital accumulation lowers mortality, inducing demographic transition and industrial revolution. Data confirm that young adult mortality is related negatively to schooling, and the rate of return to schooling, and positively to fertility. The data indicate a negative relationship between TFP growth and schooling accumulation. The model fits the data on country populations, per capita incomes, human capital, total fertility rates, infant mortality, life expectancy and conditional life expectancy.     

Models of employment and income distribution

A compact form of the Taylor/Lysy model is presented. It consists of the commodity and factor price frontiers, the saving-investment equilibrium condition and the neoclassical relationship between relative factor prices and the capital intensity. Such compact form is underdetermined. Different ‘closure rules’ give rise to different equilibria, each with its own comparative static properties. The models resulting from a few simple ‘closure rules’ are examined, starting with the full employment, flexible price model, with accumulation of capital determined by available savings. In all cases, capital is fully utilized and financial assets are ignored.