A Reassessment Of The Relationship Between Inequality And Growth: What Human Capital Inequality Data Say?’, Working Paper 2004-15 of Instituto Valenciano de Investigaciones Económicas

Whereas many theoretical models predict that inequality is harmful for growth, the cross-country empirical evidence that uses income inequality measures is not conclusive on this matter, different specifications and different econometric techniques display different results. By using a new inequality indicator that measures human capital inequality, this study finds that inequality is harmful for growth in both the long term across-countries and the short term within a country. The negative relation is mainly due to a discouraging effect of inequality on the investment rates. Moreover, in line with some theoretical models, the empirical findings give support to channels that connect inequality with fertility decisions and to mechanisms that relate inequality and investment rates when individuals are credit constraint. JEL classification: O15; 040; O2