Abstract
The impact of income inequality on subsequent growth is examined using a model designed to capture the effects of both capital-skill complementarities and political economy bargaining processes. Methodologically, the model is estimated using a fixed-effects semiparametric dynamic panel procedure. The results support the theory that the relationship is nonlinear, and influenced by capital-skill complementarities. It is found that poorer nations benefit more from (or are less harmed by) higher inequality than wealthier nations. Additionally, the empirical results provide limited support for the existence of a political economy bargaining process in nations with high levels of inequality. In highly unequal nations, additional inequality reduces subsequent economic growth. However, in more egalitarian nations, additional inequality raises subsequent economic growth.
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