Monday, October 06, 2003

Inequality and Growth

From the latest issue of the AER:

Inequality and Growth: Why Differential Fertility Matters
David de la Croix and Matthias Doepke

We develop a new theoretical link between inequality and growth. In our model, fertility and education decisions are interdependent. Poor parents decide to have many children and invest little in education. A mean-preserving spread in the income distribution increases the fertility differential between the rich and the poor, which implies that more weight gets placed on families who provide little education. Consequently, an increase in inequality lowers average education and, therefore, growth. We find that this fertility-differential effect accounts for most of the empirical relationship between inequality and growth. (JEL J13, O40)

This leads to interesting policy proposals, like sterilizing poor people. Only kidding, clearly the source of growth comes from human capital accumulation, so public policy that minimizes the inequality in acquiring human capital would prevent slower growth. This leads to a few interesting ideas, in societies where human capital is very important, regardless of socioeconomic status, like Korea, you would expect income inequality to have a smaller impact on changes in growth rates.

No comments: