An Attempt for a New Growth Model Based on Inter-class Mobility Probability

Abstract

After Kuznets' pioneering study in 1955, the relationship between growth and income distribution attracted the attention of researchers. Approaches used to explain the relationship between growth and income distribution can be summarized as wealth and redistribution, international trade, technological development, macroeconomic volatility and political economy. In this study, firstly, the theoretical background and literature regarding these approaches are mentioned. Later, based on Akerlof and Yellen's theories on the fair wage-productivity relationship, a new model was tried to be developed that links economic growth with inter class mobility probability. The model is based on the hypothesis that in a hypothetical society of two-class without government, there will be an increase in the productivity of individuals belonging to the lower class as the probability of moving up the class increases. As the probability of individuals belonging to the lower class moving up increases, the probability of individuals belonging to the upper class falling down the class also increases. For this reason, the increase in the transition between classes will lead to an increase in the efforts of individuals belonging to the upper class. An increase in the effort of both classes will result in higher output and therefore higher growth. For this reason, as the income distribution becomes more fair, the growth rate will also increase, but if the income is distributed completely equally, the performance of individuals will decrease because there is no possibility of moving to upper class. Therefore, income inequality up to a certain level motivates individuals, while income inequality above the optimal level demotivates individuals. In other words, the relationship between income inequality and growth is non-linear. Finally, the game theory version of the model is introduced in the study.