IN TRODUCTION
“T hestudyofincomeinequality - its causes, its consequences, and its poten-
tialpolicy implications - has alonghistory in economics, although ithas not
always had a high pro-- e among researchers and poiicymakers. T o borrow
a phrase from P rofessor A tkinson, income distribution in recent years has
been «broughtin from the cold».” (A lan G reenspan, openingspeech atthe
Symposium on “Income Inequality”, organized by FederalR eserve Bank of
Kansas City).
In neoclassicalgrowth models, the assumptions ofcompletemarkets and
perfectcompetition lead toergodicdynamics ofincome and wealth. T here-
fore the long-run equilibrium does notdepend on initialconditions and in-
comeheterogeneitydisappears, aconclusionwhichisclearlyinconsistentwith
the empiricalevidence.
T heendogenous growthliteraturehas revivedtheinterestofmacroecono-
mists on the issueofincomedistribution. In fact, iftherepresentative agent
hypothesis is abandoned in these models, heterogeneity persists because of
diπ erences in technologies, which agents hɛve access to, or because ofdiπ er-
entdegrees in the rate ofhuman capitalaccumulation.
R ecent empirical analysis has emphasized a negative relation between
growth and inequality. M oreover, empiricalevidence supports the viewthat
redistributive policies in many cases favorite growth.
Since the early 9 0’s, the New G rowth literature has stimulated a rich
iiterateιre on the ong- run e ects of inecμaiity. T wo chanmefe ha^e been
detected, which inequality and growth interactthrough.
T he...rstisthepolitica-ecoromicchanrιel Whichinterprets redistributive
policy as the resultofa majority vote in ordertochoose a tax rate propor-
tionalto capitalincome. Sincevoters bene.tequally from public spending
while pay in proportion to their capital income, the lower their tax base
relatively to the mean, the higherthe tax rate they prefer. T herefore, the
more unequalthe wealth distribution, the tighterthe redistributive policy.
T axation has anyway a disincentive e≈ ecton capital accumulation since it
reduces private return from capital, and gives rise to lowersavings, invest-
mentand growth. T herefore, mostofthemodels belongingtothis literature
claim thatthe redistribution from capitalists to workers negatively aɔeets
growth.
The second channel, which inequality and growth interact through, is
based on the imperfection ofcapital markets. Ifinvestment decisions take