Growth effects of inequality and redistribution: What are the transmission channels?

Abstract

Evidence from a large panel of harmonized data highlights a negative effect of income inequality on economic growth. Less equal societies tend to have less educated populations, higher fertility rates, and lower investment shares. These effects are particularly prevalent if credit availability is limited, while public education spending attenuates the negative effects of inequality. Public redistribution, measured as the difference between Ginis of market and net income, hampers growth via lower investment and increased fertility. Yet, combined with its positive effect through lower inequality, the impact of redistribution is insignificant. In developing countries redistribution can even be growth enhancing.