AN ENDOGENOUS GROWTH MODEL TO EXPLAIN THE LINK BETWEEN EQUALITY AND GROWTH

Abstract

This paper designs an endogenous growth model to explain theoretically a recently discovered empirical fact: The
negative relationship between the growth rate of per capita GDP and the level of equality in rich countries (Barro, 2000;
Forbes, 2000; Panizza, 2002; Banerjee and Duflo, 2003 and Voitchovsky, 2005). The main point of the model is to
include equality as an argument that increases the utility of the representative agent. The model does predict a negative
link between equality and growth. The intuition is as follows: more public funds devoted to social programs intended to
reduce inequality may crowd out other productive activities, thus damaging per capita growth. Nonetheless, in this
setting, a larger degree of equality in society may be optimal from the point of view of the utility of consumers, even if it
entails lower growth