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Explaining the Evidence on Inequality and Growth: Informality and Redistribution

  • Lewis S Davis
Published/Copyright: January 24, 2007
The B.E. Journal of Macroeconomics
From the journal The B.E. Journal of Macroeconomics Volume 7 Issue 1

This paper constructs a simple model that can account for both the negative relationship between growth and income inequality observed in the cross-country data and the positive relationship observed within countries over time. The model employs a dual-economy structure with formal and informal sectors. Growth is driven by formal sector human capital spillovers. Restrictive institutions impose barriers to formality that reduce the growth rate and increase inequality. Redistributive taxation lowers inequality but blunts the incentive to accumulate, lowering growth. Institutional structures vary more across than within countries. Consequently, variations in institutional barriers to formality may account for the negative relationship between growth and inequality found in the cross-country data. Variations in the intensity of redistribution may account for the positive relationship observed within countries over time.

Keywords: growth; inequality; dualism; informal sector; institutions
Published Online: 2007-1-24

©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston

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  1. Topics Article
  2. To Pool or to Aggregate? Tests with a Dynamic Panel Macroeconometric Model of Australian State Labor Markets
  3. Economic Growth: A Channel Decomposition Exercise
  4. Liquidity Effects, Variable Time Preference, and Optimal Monetary Policy
  5. Optimal Monetary Policy, Endogenous Sticky Prices, and Multiple Equilibria
  6. A Simple Wicksellian Macroeconomic Model
  7. Confidence-Enhanced Economic Growth
  8. A Positive Analysis of Targeted Employment Protection Legislation
  9. The Political Economy of Numbers: On the Application of Benford's Law to International Macroeconomic Statistics
  10. Exchange Rate Regimes, Inflation and Growth in Developing Countries -- An Assessment
  11. Does Permanent Income Determine the Vote?
  12. Rich, Poor and Growth-Miracle Nations: Multiple Equilibria Revisited
  13. Savers, Spenders and Fiscal Policy in a Small Open Economy
  14. Assessing Sign Restrictions
  15. Euro Area Inflation Differentials
  16. Decomposing Consumer Wealth Effects: Evidence on the Role of Real Estate Assets Following the Wealth Cycle of 1990-2002
  17. Gold, Fiat Money, and Price Stability
  18. Housing Tenure and Wealth Distribution in Life Cycle Economies
  19. Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries
  20. Political Sustainability of Unfunded Pensions in an Endogenous Growth Model
  21. Institutional Determinants of International Equity Portfolios - A Country-Level Analysis
  22. Contributions Article
  23. The Arrow Effect under Competitive R&D
  24. Openness, Wage Floors and Technology Change
  25. Explaining the Evidence on Inequality and Growth: Informality and Redistribution
  26. Nominal Debt Dynamics, Credit Constraints and Monetary Policy
  27. TFP Differences and the Aggregate Effects of Labor Mobility in the Long Run
  28. A Comparison of Five Federal Reserve Chairmen: Was Greenspan the Best?
  29. Specialization Patterns and the Factor Bias of Technology
  30. Inspecting the Mechanism Exactly: A Closed-form Solution to a Stochastic Growth Model
  31. ICT and Productivity Resurgence: A Growth Model for the Information Age
  32. A Macroeconomic Model of Entry with Exporters and Multinationals
  33. The Response of Business Fixed Investment to Changes in Energy Prices: A Test of Some Hypotheses about the Transmission of Energy Price Shocks
  34. Advances Article
  35. Stable Sunspot Equilibria in a Cash-in-Advance Economy
  36. Should Monetary Policy Use Long-Term Rates?
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  38. Factor Utilization and the Real Impact of Financial Crises
https://doi.org/10.2202/1935-1690.1498
Keywords for this article
growth; inequality; dualism; informal sector; institutions

Articles in the same Issue

  1. Topics Article
  2. To Pool or to Aggregate? Tests with a Dynamic Panel Macroeconometric Model of Australian State Labor Markets
  3. Economic Growth: A Channel Decomposition Exercise
  4. Liquidity Effects, Variable Time Preference, and Optimal Monetary Policy
  5. Optimal Monetary Policy, Endogenous Sticky Prices, and Multiple Equilibria
  6. A Simple Wicksellian Macroeconomic Model
  7. Confidence-Enhanced Economic Growth
  8. A Positive Analysis of Targeted Employment Protection Legislation
  9. The Political Economy of Numbers: On the Application of Benford's Law to International Macroeconomic Statistics
  10. Exchange Rate Regimes, Inflation and Growth in Developing Countries -- An Assessment
  11. Does Permanent Income Determine the Vote?
  12. Rich, Poor and Growth-Miracle Nations: Multiple Equilibria Revisited
  13. Savers, Spenders and Fiscal Policy in a Small Open Economy
  14. Assessing Sign Restrictions
  15. Euro Area Inflation Differentials
  16. Decomposing Consumer Wealth Effects: Evidence on the Role of Real Estate Assets Following the Wealth Cycle of 1990-2002
  17. Gold, Fiat Money, and Price Stability
  18. Housing Tenure and Wealth Distribution in Life Cycle Economies
  19. Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries
  20. Political Sustainability of Unfunded Pensions in an Endogenous Growth Model
  21. Institutional Determinants of International Equity Portfolios - A Country-Level Analysis
  22. Contributions Article
  23. The Arrow Effect under Competitive R&D
  24. Openness, Wage Floors and Technology Change
  25. Explaining the Evidence on Inequality and Growth: Informality and Redistribution
  26. Nominal Debt Dynamics, Credit Constraints and Monetary Policy
  27. TFP Differences and the Aggregate Effects of Labor Mobility in the Long Run
  28. A Comparison of Five Federal Reserve Chairmen: Was Greenspan the Best?
  29. Specialization Patterns and the Factor Bias of Technology
  30. Inspecting the Mechanism Exactly: A Closed-form Solution to a Stochastic Growth Model
  31. ICT and Productivity Resurgence: A Growth Model for the Information Age
  32. A Macroeconomic Model of Entry with Exporters and Multinationals
  33. The Response of Business Fixed Investment to Changes in Energy Prices: A Test of Some Hypotheses about the Transmission of Energy Price Shocks
  34. Advances Article
  35. Stable Sunspot Equilibria in a Cash-in-Advance Economy
  36. Should Monetary Policy Use Long-Term Rates?
  37. Habit Formation and Aggregate Consumption Dynamics
  38. Factor Utilization and the Real Impact of Financial Crises
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