Income inequality and growth with incomplete markets

In this paper we explore how income inequality affects growth in a dynastic family model with bequests (physical capital) and investment in human capital for children. We assume missing markets and a joint distribution of bequests and human capital, and track the evolution of income distribution across generations. We show that ini-tial inequality has a positive indirect effect on average output growth by lowering the ratio of physical to human capital, besides its standard negative direct effect. If edu-cation is mainly private (public), then income inequality retards (promotes) growth outside the balanced growth path. On the balanced path, inequality always hinders growth