from physical to human capital accumulation inequality and the process of development this paper develops a growth theory that captures the replacement of physical capital accumulation by human capital accumulation as a prime engine of growth along the process of development it argues that the positive impact of inequality on the growth process was reversed in this process in early stages of the industrial revolution when physical capital accumulation was the prime source of growth inequality stimulated development by channelling resources towards individuals with a higher propensity to save as human capital emerged as a growth engine equality alleviated adverse effects of credit constraints on human capital accumulation stimulating the growth process this research develops a growth theory that captures the endogenous replacement of physical capital accumulation by human capital accumulation as a prime engine of economic growth in the transition from the industrial revolution to modern growth the proposed theory offers a unified account for the effect of income inequality on the growth process during this transition it argues that the replacement of physical capital accumulation by human capital accumulation as a prime engine of economic growth changed the qualitative impact of inequality on the process of development in the early stages of the industrial revolution when physical capital accumulation was the prime source of economic growth inequality enhanced the process of development by channelling resources towards individuals whose marginal propensity to save is higher in the later stages of the transition to modern growth as human capital emerged as a prime engine of economic growth equality alleviated the adverse effect of credit constraints on human capital accumulation and stimulated the growth process the proposed theory unifies two fundamental approaches regarding the effect of income distribution on the process of development the classical approach and the credit market imperfection approach 1 the classical approach was originated by smith 1776 and was further interpreted and developed by keynes 1920 lewis 1954 kaldor 1957 and bourguignon 1981 according to this approach saving rates are an increasing function of wealth and inequality therefore channels resources towards individuals whose marginal propensity to save 1 the socio political economy approach provides an alternative mechanism equality diminishes the tendency for socio political instability or distortionary redistribution and hence it stimulates investment and economic growth see the comprehensive survey of benabou 1996b

growth income inequality and fiscal policy what are the relevant trade offs we develop an endogenous growth model with elastic labor supply in which agents differ in their initial endowments of physical capital in this context the growth rate and the distribution of income are jointly determined we then examine the distributional impact of different ways of financing an investment subsidy policies aimed at increasing the growth rate result in a more unequal distribution of pre tax income consistent with the positive correlation between income inequality and growth observed in the recent empirical literature however there is no conflict between efficiency and equity if inequality is measured in terms of the distribution of welfare

the carnegie conjecture some empirical evidence this paper examines tax return generated data on the labor force behavior of people before and after they receive inheritances the results are consistent with andrew carnegie s century old assertion that large inheritances decrease a person s labor force participation for example a single person who receives an inheritance of about 150 000 is roughly four times more likely to leave the labor force than a person with an inheritance below 25 000 additional albeit weaker evidence suggests that large inheritances depress labor supply even when participation is unaltered warren kendall heir to an insurance company fortune says he s worth about 5 million and has an income of about oh 300 and some thousand a year h e has never held a job or wanted to going down to sea in cruise ships is his full time pursuit he estimates that he has taken about 250 cruises over the past couple of decades spending at least 50 percent to 70 percent of the year afloat morgenthaler 1991 p al

investment tax credit in an open economy abstract this paper contrasts the effects of a permanent and temporary investment tax credit itc in an open economy in both cases an itc will initially stimulate investment while reducing employment and output and generating a current account deficit if the itc is permanent the accumulation of capital leads to a higher equilibrium capital stock higher employment and output and a reduction in the economy s stock of net credit if the itc is temporary after its removal the economy eventually moves to a new steady state equilibrium having a lower permanent capital stock and employment together with a higher stock of net credit

economic growth and inequality the role of public investment the relationship between growth and inequality is complex after discussing some general background issues motivated by extensive empirical evidence this paper focuses on public investment as a key determinant of the relationship two alternative frameworks each offering sharply contrasting perspectives are presented the first employs the representative consumer theory of distribution where agent heterogeneity originates with wealth endowments it yields an equilibrium in which aggregate dynamics drives distributional dynamics in the second agent heterogeneity arises from idiosyncratic productivity shocks and generates an equilibrium in which distributional dynamics drive growth the impact of government investment on growth and inequality are shown to contrast sharply in the two approaches thus illustrating the complexity of the growth inequality relationship

how liable should a lender be the case of judgment proof firms and environmental risk comment recently u s environmental law has shown a tendency toward increased lender liability a model of a potentially judgment proof owner of a firm a lender and a potential victim is developed in which this policy can increase accident frequency and reduce efficiency full partial and zero lender liability rules and a minimum equity requirement are analyzed partial lender liability and an equivalent minimum equity requirement deliver the highest level of efficiency although the former can deliver a higher contribution by the lender to the victim than the latter policy and empirical implications are also discussed copyright 1995 by american economic association

income distribution and macroeconomics this paper analyzes the role of wealth distribution in macroeconomics through investment in human capital it is shown that in the presence of credit markets imperfections and indivisibilities in investment in human capital the initial distribution of wealth affects aggregate output and investment both in the short and in the long run as there are multiple steady states this paper therefore provides an additional explanation for the persistent differences in per capita output across countries furthermore the paper shows that cross country differences in macroeconomic adjustment to aggregate shocks can be attributed among other factors to differences in wealth and income distribution across countries

new ways of looking at old issues inequality and growth abstract the paper uses new cross country data on income and asset land distribution to show that i there is a strong negative relationship between initial inequality in the asset distribution and long term growth ii inequality reduces income growth for the poor but not for the rich and iii available longitudinal data provide little support for the kuznets hypothesis policies that increase aggregate investment and facilitate acquisition of assets by the poor might thus be doubly beneficial for growth and poverty reduction

how misleading is linearization evaluating the dynamics of the neoclassical growth model this paper investigates the reliability of employing linearization to evaluate the dynamic adjustments to changes in productive government spending in a ramsey growth model if government expenditure is introduced as a flow and the dynamic adjustment is fast linearization may yield a reasonably good approximation to the true dynamics even for fairly large policy shocks if government expenditure assumes the form of a stock leading to more sluggish adjustment linearization may yield misleading predictions these errors occur at the beginning of the transition and weigh heavily in welfare calculations the implications for temporary shocks and the speed of convergence are also considered

infrastructure and inequality abstract we develop a model in which public capital is both an engine of growth and a determinant of the distributions of wealth income and welfare government investment increases wealth inequality over time regardless of its financing the time path of income inequality is however highly sensitive to financing policies and is often characterized by sharp intertemporal tradeoffs with income inequality declining in the short run but increasing in the long run public investment generates a positive correlation between growth and income inequality along the transition path but their short run and long run relationship depends critically on i how externalities impinge on allocation decisions ii financing policies and iii the time period of consideration finally these policies also generate sharp trade offs between average welfare and its distribution with government investment improving average welfare but also increasing its dispersion our results are obtained numerically but extensive sensitivity analysis confirms their robustness across key parameter values

moral hazard and limited liability the real effects of contract bargaining abstract i examine the standard assumption in the moral hazard agency literature that the principal has all the bargaining power at the contract offer stage when the agent has limited liability as is often the case in practice the contract changes according to the distribution of bargaining power and consequently so does the agents effort implications of this result are examined

a new data set measuring income inequality this article presents a new data set on inequality in the distribution of income the authors explain the criteria they applied in selecting data on gini coefficients and on individual quintile groups income shares comparison of the new data set with existing compilations reveals that the data assembled here represent an improvement in quality and a significant expansion in coverage although differences in the definition of the underlying data might still affect inter temporal and international comparability based on this new data set the authors do not find a systematic link between growth and changes in aggregate inequality they do find a strong positive relationship between growth and reduction of poverty

education democracy and growth abstract this note presents a model of endogenous growth where redistribution determined by a political equilibrium is in the form of public education it is shown that there need not be a negative relationship between growth and redistribution as public education increases the level of human capital in the conomy and at the same time tends to produce a more even income distribution

growth and inequality dependence on the time path of productivity increases and other structural changes abstract this paper examines the significance of the time path of a given productivity increase on growth and inequality whereas the time path impacts only the transitional paths of aggregate quantities it has both transitional and permanent consequences for wealth and income distribution hence the growth inequality tradeoff generated by a given discrete increase in productivity contrasts sharply with that obtained when the same productivity increase occurs gradually the latter can generate a kuznets type relationship between inequality and per capita income our results suggest that economies with similar aggregate structural characteristics may have different outcomes for income and wealth inequality depending on the nature of the productivity growth path

distributional dynamics in a neoclassical growth model the role of elastic labor supply we examine the evolution of the distributions of wealth and income in a ramsey model in which agents differ in their initial capital endowment and where the labor supply is endogenous the assumption that the utility function is homogeneous implies that the macroeconomic equilibrium is independent of the distribution of wealth and allows us to characterize fully income and wealth dynamics we find that although the dynamics of the distribution of wealth are similar under fixed and flexible labor those of the income distribution are not in response to a structural change income inequality may move in opposite ways depending on whether or not the labor supply is fixed

equity and efficiency in human capital investment the local connection a general model of community formation and human capital accumulation with social spillovers and decentralized school funding is used to analyse the causes of economic segregation and its consequences for equity and efficiency significant polarization arises from minor differences in endowments preferences or access to capital markets this makes income inequality more persistent across generations but the same need not be true for wealth equilibrium stratification tends to be excessive resulting in low aggregate surplus whether state equalization of school resources can remedy these problems hinges on how purchased social and family inputs interact in education and in mobility decisions

dynamic status effects savings and income inequality this paper advances the hypothesis that the intensity of status preferences depends negatively on the average wealth of society endogenous dynamic status effect in accordance with empirical evidence our theory replicates the contradictory historical facts of an increasing saving rate along with declining returns to capital over time by affecting the dynamics of the saving rate the dynamic status effect raises inequality thereby providing a behavioural mechanism for the observed diverse dynamics of income inequality across countries in countries in which the dynamic status effect is strong weak inequality rises declines over time in response to a positive productivity shock

liability and large scale long term hazards this paper analyzes the application of liability to large scale long term hazards the key features distinguishing such hazards are the long temporal separation between exposure to a hazard and disease and the large damages when injuries finally emerge the large scale of damages creates a strong incentive to avoid liability payments and the long temporal separation creates numerous avenues through which parties can avoid paying possible damage awards the analysis focuses on the incentive to avoid paying damages by vertically divesting production tasks associated with serious occupational risks such divestiture can lower liability costs if the small firm operating the risky stage goes out of business before latent injuries emerge or has insufficient assets to pay damages and declares bankruptcy when suits are filed the paper then presents an empirical regression analysis of small firm entry into the u s economy between 1967 and 1980 the period in which liability laws were changing the point estima

technological progress mobility and economic growth this paper analyzes the relationship between technological progress wage inequality intergenerational earnings mobility and economic growth in periods of major technological inventions a decline in the relative importance of initial conditions raises inequality enhances mobility and generates a larger concentration of high ability individuals in technologically advanced sectors stimulating future technological progress and growth however once technologies become more accessible mobility is diminished and inequality decreases but becomes more persistent the reduction in the concentration of ability in technologically advanced sectors diminishes the likelihood of technological breakthroughs and slows future growth user friendliness therefore becomes unfriendly to future economic growth copyright 1997 by american economic association

inequality growth and environmental quality trade offs in a model with human capital accumulation this paper develops a simple endogenous growth model where pollution exposure and vulnerability are unequally spread across the population and growth and distribution are endogenous in this set up we investigate whether trade offs between growth distributional and environmental concerns may emerge we show that a tighter environmental policy reduces income inequality and can improve both growth and total welfare immediate welfare losses though do occur and are larger for countries that start at low levels of environmental quality e g developing countries inegalite croissance et qualite de l environnement arbitrages dans un modele d accumulation de capital humain nous developpons un modele de croissance endogene ou l exposition et la vulnerabilite a la pollution sont inegalement reparties dans la population et ou la croissance et la distribution des revenus sont determinees de facon endogene dans ce cadre d analyse nous cherchons s il existe des arbitrages entre la croissance les inegalites et l environnement notamment dans les pays en developpement nous montrons qu une politique environnementale plus stricte conduit a la fois a une reduction des inegalit es et a une augmentation de la croissance et du bien etre dans un premier temps cependant ce changement de politique conduit a une reduction du bien etre qui est relativement plus importante pour les pays dont la qualite environmentale est initiallement faible e g les pays en developpement

distributive politics and economic growth a crude distinction between economics and politics would be that economics is concerned with expanding the pie while politics is about distributing it in this paper we analyze the relationship between the two we focus on how an economy s initial configuration of resources shapes the political struggle for income and wealth distribution and how that in turn affects long run growth our main conclusion is that inequality is conducive to the adoption of growth retarding policies we derive this result from a simple political economy model of growth and present cross country evidence consistent with it the key feature of our model is that individuals differ in their relative factor endowments we distinguish between two types of factors an accumulated factor called capital and a nonaccumulated factor called labor growth is driven by the expansion of the capital stock which is in turn determined by individual saving decisions long run growth is endogenous as the aggregate production function is taken to be linearly homogeneous in capital and productive government services taken together the provision of government services is financed by a tax on capital because government services are productive a small tax on

famine incomes and employment has botswana anything to teach africa abstract this paper analyzes the objectives structure and success of the botswana drought relief program between 1982 and 1985 in terms of its impact on lost income and employment the design of botswana s famine containment strategy was directed towards the replacement of lost income and the preservation of productive assets it was successful in reaching all of its stated objectives however the paper argues that underlying rural unemployment both precipitated the crisis and was aggravated by it the paper therefore proposes that famine management should be based on an employment as well as an incomes theory of famine this is the main lesson botswana s experience has to offer

labour market institutions and the personal distribution of income in the oecd we examine what determines differences across countries and over time in the distribution of personal incomes in the oecd we first model the wage determination process and show that unemployment the labour share and the wage differential are all functions of labour market institutions next we show that in a model economy with only four types of agents capitalists skilled and unskilled workers and unemployed the gini coefficient of personal incomes can be expressed as a function of the above three variables labour market institutions hence affect income inequality though the sign of their impact is ambiguous stronger unions and or a more generous unemployment benefit tend to reduce inequality through reduced wage differentials a higher labour share and also higher unemployment we then use a panel of oecd countries for the period 1970 96 to examine these effects we find first that the labour share remains an important aspect of overall inequality patterns and second that stronger unions and a more generous unemployment benefit tend to reduce income inequality high capital labour ratios also emerge as a strong equalising factor which has in part offset the impact of increasing wage inequality on the us distribution of personal incomes

environmental risks and bank liability abstract many governments have introduced or are considering introducing laws to recover from the liable parties the cleanup costs caused by pollution damages in particular the banks who finance the firms causing environmental damages may be considered liable in various court cases in the us and elsewhere banks have been found liable while they have been exempted in others we develop a model in which the insurance sector may insure the firm for the pollution risk and the bank may lend money for investment under complete information of the bank about the firm s activities the limited liability of the firm induces excessive investment and insufficient care but full liability of the bank creates the appropriate internalization of the environmental risk this rationalization of the laws on lender liability must be qualified because in general the banks suffer from agency problems adverse selection and moral hazard in their relationships with firms in the adverse selection case full liability of the bank leads to underinvestment partial liability is better but may fail to implement the optimal second best allocation in the case of moral hazard full responsibility is killing the project too often while still leading to low care too often partial responsibility may achieve the second best optimal allocation but in some cases the level of responsibility necessary to induce the proper level of care is too high for the project to be financed by the bank we conclude with a discussion of the implications of our results with regards to liability laws for environmental damages