Income Inequality is not Harmful for Growth: Theory and Evidence |
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| Authors: | Hongyi Li,& Heng-fu Zou |
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| Affiliation: | Faculty of Business Administration, Chinese University of Hong Kong, Hong Kong,;Institute for Advanced Studies, Wuhan University, Wuhan, China 430072;and Development Research Group, World Bank, Room MC2-611, 1818 H St. NW, Washington, DC 20433, USA. |
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| Abstract: | The paper shows that income inequality may theoretically lead to higher economic growth if public consumption enters the utility function. Empirically, baseline estimations and a sensitivity analysis show that income inequality is positively, and most of the time significantly, associated with economic growth. These findings stand in sharp contrast to the negative association between inequality and growth propounded by Alesina and Rodrik and by Persson and Tabellini. |
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