A Reassessment of the Relationship between Inequality and Growth
Forbes, Kristin J. 2000. "A Reassessment of the Relationship between Inequality and Growth."
American Economic Review,
This paper challenges the current belief that income inequality has a negative relationship with economic growth. It uses an improved data set on income inequality, which not only reduces measurement error, but also allows estimation via a panel technique. Panel estimation makes it possible to control for time-invariant country-specific effects, therefore eliminating a potential source of omitted-variable bias. Results suggest that in the short and medium term, an increase in a country's level of income inequality has a significant positive relationship with subsequent economic growth. This relationship is highly robust across samples, variable definitions, and model specifications.
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Forbes, Kristin J. (MIT)
O15: Economic Development: Human Resources; Human Development; Income Distribution; Migration
O47: Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence