POLITICAL EQUILIBRIUM, INCOME-DISTRIBUTION, AND GROWTH

This paper analyzes the impact of income distribution on growth when i nvestment in human capital is the source of growth and individuals vot e over the degree of redistribution in the economy. The model has thre e 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 grou ps, 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 th is externality is promoted, in which case growth is enhanced, or preve nted, in which case growth is stopped. Using a non-overlapping generat ions model with voting, I derive several empirical implications. In pa rticular, the model implies an inverted-U relation between levels of i nequality and levels of income in cross-sections, but not necessarily in time series, a result that seems consistent with a number of empiri cal studies.