Inequality and Growth: What Can the Data Say?
NBER Working Paper No. 7793
This paper describes the correlations between inequality and the growth rates in cross-country data. Using non-parametric methods, we show that the growth rate is an inverted U-shaped function of net changes in inequality: Changes in inequality (in any direction) are associated with reduced growth in the next period. The estimated relationship is robust to variations in control variables and estimation methods. This inverted U-curve is consistent with a simple political economy model, although, as we point out, efforts to interpret this model causally run into difficult identification problems. We show that this non-linearity is sufficient to explain why previous estimates of the relationship between the level of inequality and growth are so different from one another.
Published: Banerjee, Abhijit V. and Esther Duflo. "Inequality And Growth: What Can The Data Say?," Journal of Economic Growth, 2003, v8(3,Sep), 267-299.