Deinonychus antirrhopus

Income Inequality and Economic Growth--Part II

I have been reading another article on income inequality. This previous post suggested that most research indicated that income inequality had either a negative impact or a positive impact. The author did speculate that perhaps there might be an indeterminant effect (i.e., basically the impact of income inequality on economic growth depends on other factors), but didn't point to anything concrete.

Well, this paper makes such a claim. The authors generalize some early work by Li and Zuo (1998--check the paper for the exact citation). They generalize the utility function from a natural log function to a Constant Relative Risk Aversion (CRRA) utility function. The latter includes the former as a special case.

They also make use of majority voting (with the median voter setting the tax rate) to determine tax rates on capital income and look to see what they get. The results are basically ambiguous (i.e., they depend on various parameters in the model).

So what is the use of this? Well if you can get a pretty good fix on what the values are of these parameters you can determine whether or not inequality is good or bad. Further, this solves some of the problems highlighted in earlier research that shows mixed results in terms of a relationship between income inequality and economic growth.