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The B.E. Journal of Macroeconomics

Editor-in-Chief: Cavalcanti, Tiago / Mertens, Karel

Ed. by Abraham, Arpad / Carceles-Poveda , Eva / Debortoli, Davide / Kambourov, Gueorgui / Lambertini, Luisa / Pavoni, Nicola / Ruhl, Kim / Nimark, Kristoffer / Wang, Pengfei


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1935-1690
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Explaining the Evidence on Inequality and Growth: Informality and Redistribution

Lewis S Davis1

1Union College,

Citation Information: The B.E. Journal of Macroeconomics. Volume 7, Issue 1, ISSN (Online) 1935-1690, DOI: 10.2202/1935-1690.1498, January 2007

Publication History

Published Online:
2007-01-24

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

Citing Articles

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[1]
Mthuli Ncube, John C. Anyanwu, and Kjell Hausken
African Development Review, 2014, Volume 26, Number 3, Page 435
[2]
Roberto Dell'Anno and Adalgiso Amendola
Review of Income and Wealth, 2015, Volume 61, Number 2, Page 274

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