The World Distribution of Income: Country TFP Choice in a Nelson-Phelps World

In this paper we construct a stochastic dynamic general equilibrium model of the world distribution of income. World growth is endogenous and driven by investments in TFP. All countries invest in TFP in order to increase their productivity, and each country internalizes the dynamic effects of its own TFP accumulation, i.e., through its own investment. In addition, there are technological spillovers across countries, modeled according to the Nelson-Phelps specification. We restrict attention to a situation of a balanced rate of world growth, where the distribution of countries in terms of relative income levels per capita is constant over time. Countries also face idiosyncratic technology shocks, so that although the distribution of countries is constant, individual countries periodically experience episodes of rapid growth as well as episodes of slow growth. We find that even under the assumption that all countries have identical technologies for TFP accumulation, the world distribution of income across countries can be asymmetric; it is twin-peaked, or bimodal. More specifically, twin-peaked world distributions of income arise if the catch-up term in the Nelson-Phelps equation is sufficiently weak. If, on the other hand, technological catch-up is important, the world distribution of income is unimodal