Political Equilibrium, Income Distribution, and Growth

TLDR

The model has three main features. The paper analyzes how income distribution affects growth when human‑capital investment drives growth and voters decide redistribution levels. Using a non‑overlapping generations model with voting, the authors show that different income distributions promote high growth at different income levels, human‑capital investment generates a productivity externality, and the initial distribution and political equilibrium determine whether this externality is transmitted, thereby influencing growth. The model predicts an inverted‑U relationship between inequality and income across cross‑sections, a pattern that aligns with several empirical studies.

Abstract

This paper analyzes the impact of income distribution on growth when investment in human capital is the source of growth and individuals vote over the degree of redistribution in the economy. The model has three main features. First, very different patterns of income distribution are conducive to high growth at different levels of per capita income. Second, growth is associated with an externality whereby investment in human capital by one group increases the productivity of other groups, thus potentially enabling them to invest in human capital. Third, the initial pattern of income distribution and the resulting political equilibrium are crucial in determining whether the transmission of this externality is promoted, in which case growth is enhanced, or prevented, in which case growth is stopped. Using a non-overlapping generations model with voting, I derive several empirical implications. In particular, the model implies an inverted-U relation between levels of inequality and levels of income in cross-sections, but not necessarily in time series, a result that seems consistent with a number of empirical studies.