inequality and the process of development · inequality is bene cial for growth (in the...
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![Page 1: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/1.jpg)
Inequality and the Process of Development
Omer Ozak
Department of EconomicsSouthern Methodist University
Economic Growth and Comparative Development
Omer Ozak Inequality and Growth Growth & Comparative Development 1 / 73
![Page 2: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/2.jpg)
From the Classical to the Modern Perspective The Classical Paradigm
The Classical Theory
Inequality is beneficial for growth (in the post-industrialization stage)
Keynes (1920), Kaldor (1957)
The marginal propensity to save increases with income
Inequality channels resources towards individuals whose marginal propensity
to save is higher
=⇒ increases aggregate savings & capital accumulation
=⇒ enhances the development process
Omer Ozak Inequality and Growth Growth & Comparative Development 2 / 73
![Page 3: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/3.jpg)
From the Classical to the Modern Perspective The Classical Paradigm
The Classical Theory
Inequality is beneficial for growth (in the post-industrialization stage)
Keynes (1920), Kaldor (1957)
The marginal propensity to save increases with income
Inequality channels resources towards individuals whose marginal propensity
to save is higher
=⇒ increases aggregate savings & capital accumulation
=⇒ enhances the development process
Omer Ozak Inequality and Growth Growth & Comparative Development 2 / 73
![Page 4: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/4.jpg)
From the Classical to the Modern Perspective The Classical Paradigm
The Classical Theory
Inequality is beneficial for growth (in the post-industrialization stage)
Keynes (1920), Kaldor (1957)
The marginal propensity to save increases with income
Inequality channels resources towards individuals whose marginal propensity
to save is higher
=⇒ increases aggregate savings & capital accumulation
=⇒ enhances the development process
Omer Ozak Inequality and Growth Growth & Comparative Development 2 / 73
![Page 5: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/5.jpg)
From the Classical to the Modern Perspective The Classical Paradigm
The Classical Theory
Inequality is beneficial for growth (in the post-industrialization stage)
Keynes (1920), Kaldor (1957)
The marginal propensity to save increases with income
Inequality channels resources towards individuals whose marginal propensity
to save is higher
=⇒ increases aggregate savings & capital accumulation
=⇒ enhances the development process
Omer Ozak Inequality and Growth Growth & Comparative Development 2 / 73
![Page 6: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/6.jpg)
From the Classical to the Modern Perspective The Classical Paradigm
The Classical Theory
Inequality is beneficial for growth (in the post-industrialization stage)
Keynes (1920), Kaldor (1957)
The marginal propensity to save increases with income
Inequality channels resources towards individuals whose marginal propensity
to save is higher
=⇒ increases aggregate savings & capital accumulation
=⇒ enhances the development process
Omer Ozak Inequality and Growth Growth & Comparative Development 2 / 73
![Page 7: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/7.jpg)
From the Classical to the Modern Perspective The Classical Paradigm
The Classical Theory
Inequality is beneficial for growth (in the post-industrialization stage)
Keynes (1920), Kaldor (1957)
The marginal propensity to save increases with income
Inequality channels resources towards individuals whose marginal propensity
to save is higher
=⇒ increases aggregate savings & capital accumulation
=⇒ enhances the development process
Omer Ozak Inequality and Growth Growth & Comparative Development 2 / 73
![Page 8: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/8.jpg)
From the Classical to the Modern Perspective The Neoclassical Viewpoint
The Neoclassical Paradigm
The Representative Agent Approach
Rejects the role of heterogeneity, and thus income distribution, in eco-nomic growth
Growth Process ⇒ Income Distribution
Income Distribution ; Growth Process
Omer Ozak Inequality and Growth Growth & Comparative Development 3 / 73
![Page 9: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/9.jpg)
From the Classical to the Modern Perspective The Neoclassical Viewpoint
The Neoclassical Paradigm
The Representative Agent Approach
Rejects the role of heterogeneity, and thus income distribution, in eco-nomic growth
Growth Process ⇒ Income Distribution
Income Distribution ; Growth Process
Omer Ozak Inequality and Growth Growth & Comparative Development 3 / 73
![Page 10: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/10.jpg)
From the Classical to the Modern Perspective The Neoclassical Viewpoint
The Neoclassical Paradigm
The Representative Agent Approach
Rejects the role of heterogeneity, and thus income distribution, in eco-nomic growth
Growth Process ⇒ Income Distribution
Income Distribution ; Growth Process
Omer Ozak Inequality and Growth Growth & Comparative Development 3 / 73
![Page 11: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/11.jpg)
From the Classical to the Modern Perspective The Neoclassical Viewpoint
The Neoclassical Paradigm
The Representative Agent Approach
Rejects the role of heterogeneity, and thus income distribution, in eco-nomic growth
Growth Process ⇒ Income Distribution
Income Distribution ; Growth Process
Omer Ozak Inequality and Growth Growth & Comparative Development 3 / 73
![Page 12: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/12.jpg)
From the Classical to the Modern Perspective The Neoclassical Viewpoint
The Neoclassical Paradigm
The Representative Agent Approach
Rejects the role of heterogeneity, and thus income distribution, in eco-nomic growth
Growth Process ⇒ Income Distribution
Income Distribution ; Growth Process
Omer Ozak Inequality and Growth Growth & Comparative Development 3 / 73
![Page 13: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/13.jpg)
The Modern Perspective
The Modern Perspective: Origins
Galor and Zeira (1988, 1993)
Unlike the Neoclassical Paradigm
Income Distribution ⇒ the growth process
Unlike the Classical Perspective
Underlined the adverse effect of Inequality on the growth process
Omer Ozak Inequality and Growth Growth & Comparative Development 4 / 73
![Page 14: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/14.jpg)
The Modern Perspective
The Modern Perspective: Origins
Galor and Zeira (1988, 1993)
Unlike the Neoclassical Paradigm
Income Distribution ⇒ the growth process
Unlike the Classical Perspective
Underlined the adverse effect of Inequality on the growth process
Omer Ozak Inequality and Growth Growth & Comparative Development 4 / 73
![Page 15: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/15.jpg)
The Modern Perspective
The Modern Perspective: Origins
Galor and Zeira (1988, 1993)
Unlike the Neoclassical Paradigm
Income Distribution ⇒ the growth process
Unlike the Classical Perspective
Underlined the adverse effect of Inequality on the growth process
Omer Ozak Inequality and Growth Growth & Comparative Development 4 / 73
![Page 16: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/16.jpg)
The Modern Perspective
The Modern Perspective: Origins
Galor and Zeira (1988, 1993)
Unlike the Neoclassical Paradigm
Income Distribution ⇒ the growth process
Unlike the Classical Perspective
Underlined the adverse effect of Inequality on the growth process
Omer Ozak Inequality and Growth Growth & Comparative Development 4 / 73
![Page 17: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/17.jpg)
The Modern Perspective
The Modern Perspective: Origins
Galor and Zeira (1988, 1993)
Unlike the Neoclassical Paradigm
Income Distribution ⇒ the growth process
Unlike the Classical Perspective
Underlined the adverse effect of Inequality on the growth process
Omer Ozak Inequality and Growth Growth & Comparative Development 4 / 73
![Page 18: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/18.jpg)
The Modern Perspective
The Modern Perspective: Origins
Galor and Zeira (1988, 1993)
Unlike the Neoclassical Paradigm
Income Distribution ⇒ the growth process
Unlike the Classical Perspective
Underlined the adverse effect of Inequality on the growth process
Omer Ozak Inequality and Growth Growth & Comparative Development 4 / 73
![Page 19: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/19.jpg)
The Modern Perspective The Credit market imperfection Channel
The Credit Market Imperfections Approach: Assumptions
Main assumptions:
Credit market imperfections
Differences in the interest rates for borrowers and lenders
and either
Fixed investment cost in education or in other individual-specific projects
or
Saving and bequest rates are increasing function of wealth (Moav, (2002) Galor and
Moav (2004))
Omer Ozak Inequality and Growth Growth & Comparative Development 5 / 73
![Page 20: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/20.jpg)
The Modern Perspective The Credit market imperfection Channel
The Credit Market Imperfections Approach: Assumptions
Main assumptions:
Credit market imperfections
Differences in the interest rates for borrowers and lenders
and either
Fixed investment cost in education or in other individual-specific projects
or
Saving and bequest rates are increasing function of wealth (Moav, (2002) Galor and
Moav (2004))
Omer Ozak Inequality and Growth Growth & Comparative Development 5 / 73
![Page 21: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/21.jpg)
The Modern Perspective The Credit market imperfection Channel
The Credit Market Imperfections Approach: Assumptions
Main assumptions:
Credit market imperfections
Differences in the interest rates for borrowers and lenders
and either
Fixed investment cost in education or in other individual-specific projects
or
Saving and bequest rates are increasing function of wealth (Moav, (2002) Galor and
Moav (2004))
Omer Ozak Inequality and Growth Growth & Comparative Development 5 / 73
![Page 22: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/22.jpg)
The Modern Perspective The Credit market imperfection Channel
The Credit Market Imperfections Approach: Assumptions
Main assumptions:
Credit market imperfections
Differences in the interest rates for borrowers and lenders
and either
Fixed investment cost in education or in other individual-specific projects
or
Saving and bequest rates are increasing function of wealth (Moav, (2002) Galor and
Moav (2004))
Omer Ozak Inequality and Growth Growth & Comparative Development 5 / 73
![Page 23: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/23.jpg)
The Modern Perspective The Credit market imperfection Channel
The Credit Market Imperfections Approach: Assumptions
Main assumptions:
Credit market imperfections
Differences in the interest rates for borrowers and lenders
and either
Fixed investment cost in education or in other individual-specific projects
or
Saving and bequest rates are increasing function of wealth (Moav, (2002) Galor and
Moav (2004))
Omer Ozak Inequality and Growth Growth & Comparative Development 5 / 73
![Page 24: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/24.jpg)
The Modern Perspective The Credit market imperfection Channel
The Credit Market Imperfections Approach: Mechanism
Inequality affects occupational choices: skilled vs. unskilled workers or en-
trepreneurs vs. workers
Non-poor economies:
Inequality =⇒ under-investment in human capital (inv’t projects)that is transmitted across generations =⇒ lower output growth inthe short-run and in the long-run
Poor economies:
Inequality permits some investment in HC (inv’t projects) and maythus promote output growth
The human capital channel is consistent with evidence (Perotti (1996))
Omer Ozak Inequality and Growth Growth & Comparative Development 6 / 73
![Page 25: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/25.jpg)
The Modern Perspective The Credit market imperfection Channel
The Credit Market Imperfections Approach: Mechanism
Inequality affects occupational choices: skilled vs. unskilled workers or en-
trepreneurs vs. workers
Non-poor economies:
Inequality =⇒ under-investment in human capital (inv’t projects)that is transmitted across generations =⇒ lower output growth inthe short-run and in the long-run
Poor economies:
Inequality permits some investment in HC (inv’t projects) and maythus promote output growth
The human capital channel is consistent with evidence (Perotti (1996))
Omer Ozak Inequality and Growth Growth & Comparative Development 6 / 73
![Page 26: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/26.jpg)
The Modern Perspective The Credit market imperfection Channel
The Credit Market Imperfections Approach: Mechanism
Inequality affects occupational choices: skilled vs. unskilled workers or en-
trepreneurs vs. workers
Non-poor economies:
Inequality =⇒ under-investment in human capital (inv’t projects)that is transmitted across generations =⇒ lower output growth inthe short-run and in the long-run
Poor economies:
Inequality permits some investment in HC (inv’t projects) and maythus promote output growth
The human capital channel is consistent with evidence (Perotti (1996))
Omer Ozak Inequality and Growth Growth & Comparative Development 6 / 73
![Page 27: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/27.jpg)
The Modern Perspective The Credit market imperfection Channel
The Credit Market Imperfections Approach: Mechanism
Inequality affects occupational choices: skilled vs. unskilled workers or en-
trepreneurs vs. workers
Non-poor economies:
Inequality =⇒ under-investment in human capital (inv’t projects)that is transmitted across generations =⇒ lower output growth inthe short-run and in the long-run
Poor economies:
Inequality permits some investment in HC (inv’t projects) and maythus promote output growth
The human capital channel is consistent with evidence (Perotti (1996))
Omer Ozak Inequality and Growth Growth & Comparative Development 6 / 73
![Page 28: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/28.jpg)
The Modern Perspective The Credit market imperfection Channel
The Credit Market Imperfections Approach: Mechanism
Inequality affects occupational choices: skilled vs. unskilled workers or en-
trepreneurs vs. workers
Non-poor economies:
Inequality =⇒ under-investment in human capital (inv’t projects)that is transmitted across generations =⇒ lower output growth inthe short-run and in the long-run
Poor economies:
Inequality permits some investment in HC (inv’t projects) and maythus promote output growth
The human capital channel is consistent with evidence (Perotti (1996))
Omer Ozak Inequality and Growth Growth & Comparative Development 6 / 73
![Page 29: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/29.jpg)
The Modern Perspective The Political Economy Channel
The Political Economy Approach
Echoes the hypothesis of the CMI Approach
Inequality is harmful for the growth process
Inequality =⇒ political pressure for redistribution
Higher (distortionary) taxation =⇒ lower investment and slowereconomic growth
Alesina and Rodrik, (1994) Persson and Tebelini (1994)
This channel is inconsistent with evidence (Perotti (1996))
Omer Ozak Inequality and Growth Growth & Comparative Development 7 / 73
![Page 30: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/30.jpg)
The Modern Perspective The Political Economy Channel
The Political Economy Approach
Echoes the hypothesis of the CMI Approach
Inequality is harmful for the growth process
Inequality =⇒ political pressure for redistribution
Higher (distortionary) taxation =⇒ lower investment and slowereconomic growth
Alesina and Rodrik, (1994) Persson and Tebelini (1994)
This channel is inconsistent with evidence (Perotti (1996))
Omer Ozak Inequality and Growth Growth & Comparative Development 7 / 73
![Page 31: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/31.jpg)
The Modern Perspective The Political Economy Channel
The Political Economy Approach
Echoes the hypothesis of the CMI Approach
Inequality is harmful for the growth process
Inequality =⇒ political pressure for redistribution
Higher (distortionary) taxation =⇒ lower investment and slowereconomic growth
Alesina and Rodrik, (1994) Persson and Tebelini (1994)
This channel is inconsistent with evidence (Perotti (1996))
Omer Ozak Inequality and Growth Growth & Comparative Development 7 / 73
![Page 32: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/32.jpg)
The Modern Perspective The Political Economy Channel
The Political Economy Approach
Echoes the hypothesis of the CMI Approach
Inequality is harmful for the growth process
Inequality =⇒ political pressure for redistribution
Higher (distortionary) taxation =⇒ lower investment and slowereconomic growth
Alesina and Rodrik, (1994) Persson and Tebelini (1994)
This channel is inconsistent with evidence (Perotti (1996))
Omer Ozak Inequality and Growth Growth & Comparative Development 7 / 73
![Page 33: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/33.jpg)
The Modern Perspective The Political Economy Channel
The Political Economy Approach
Echoes the hypothesis of the CMI Approach
Inequality is harmful for the growth process
Inequality =⇒ political pressure for redistribution
Higher (distortionary) taxation =⇒ lower investment and slowereconomic growth
Alesina and Rodrik, (1994) Persson and Tebelini (1994)
This channel is inconsistent with evidence (Perotti (1996))
Omer Ozak Inequality and Growth Growth & Comparative Development 7 / 73
![Page 34: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/34.jpg)
The Modern Perspective The Political Economy Channel
The Political Economy Approach
Echoes the hypothesis of the CMI Approach
Inequality is harmful for the growth process
Inequality =⇒ political pressure for redistribution
Higher (distortionary) taxation =⇒ lower investment and slowereconomic growth
Alesina and Rodrik, (1994) Persson and Tebelini (1994)
This channel is inconsistent with evidence (Perotti (1996))
Omer Ozak Inequality and Growth Growth & Comparative Development 7 / 73
![Page 35: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/35.jpg)
The Modern Perspective The Political Economy Channel
The Political Economy Approach: An Alternative Channel
Inequality is harmful for the growth process
Inequality =⇒ incentive for better endowed agents (landowners) toblock redistribution
Efficient redistribution policies are not implemented
Benabou, (2000), Galor-Moav-Vollrath (2009)
Omer Ozak Inequality and Growth Growth & Comparative Development 8 / 73
![Page 36: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/36.jpg)
The Modern Perspective The Political Economy Channel
The Political Economy Approach: An Alternative Channel
Inequality is harmful for the growth process
Inequality =⇒ incentive for better endowed agents (landowners) toblock redistribution
Efficient redistribution policies are not implemented
Benabou, (2000), Galor-Moav-Vollrath (2009)
Omer Ozak Inequality and Growth Growth & Comparative Development 8 / 73
![Page 37: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/37.jpg)
The Modern Perspective The Political Economy Channel
The Political Economy Approach: An Alternative Channel
Inequality is harmful for the growth process
Inequality =⇒ incentive for better endowed agents (landowners) toblock redistribution
Efficient redistribution policies are not implemented
Benabou, (2000), Galor-Moav-Vollrath (2009)
Omer Ozak Inequality and Growth Growth & Comparative Development 8 / 73
![Page 38: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/38.jpg)
The Modern Perspective The Political Economy Channel
The Political Economy Approach: An Alternative Channel
Inequality is harmful for the growth process
Inequality =⇒ incentive for better endowed agents (landowners) toblock redistribution
Efficient redistribution policies are not implemented
Benabou, (2000), Galor-Moav-Vollrath (2009)
Omer Ozak Inequality and Growth Growth & Comparative Development 8 / 73
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The Modern Perspective Socio-Political Instability
The Socio-Political Instability Approach
Echoes the hypothesis of the CMI Approach
Inequality is harmful for the growth process
Inequality =⇒ Socio-Political instability
Socio-Political instability =⇒ reduces the security of property rights=⇒ lower investment and slower economic growth (Alesina and Perotti (1996))
This channel is consistent with evidence (Perotti (1996))
Omer Ozak Inequality and Growth Growth & Comparative Development 9 / 73
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The Modern Perspective Socio-Political Instability
The Socio-Political Instability Approach
Echoes the hypothesis of the CMI Approach
Inequality is harmful for the growth process
Inequality =⇒ Socio-Political instability
Socio-Political instability =⇒ reduces the security of property rights=⇒ lower investment and slower economic growth (Alesina and Perotti (1996))
This channel is consistent with evidence (Perotti (1996))
Omer Ozak Inequality and Growth Growth & Comparative Development 9 / 73
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The Modern Perspective Socio-Political Instability
The Socio-Political Instability Approach
Echoes the hypothesis of the CMI Approach
Inequality is harmful for the growth process
Inequality =⇒ Socio-Political instability
Socio-Political instability =⇒ reduces the security of property rights=⇒ lower investment and slower economic growth (Alesina and Perotti (1996))
This channel is consistent with evidence (Perotti (1996))
Omer Ozak Inequality and Growth Growth & Comparative Development 9 / 73
![Page 42: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/42.jpg)
The Modern Perspective Socio-Political Instability
The Socio-Political Instability Approach
Echoes the hypothesis of the CMI Approach
Inequality is harmful for the growth process
Inequality =⇒ Socio-Political instability
Socio-Political instability =⇒ reduces the security of property rights=⇒ lower investment and slower economic growth (Alesina and Perotti (1996))
This channel is consistent with evidence (Perotti (1996))
Omer Ozak Inequality and Growth Growth & Comparative Development 9 / 73
![Page 43: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/43.jpg)
The Modern Perspective Socio-Political Instability
The Socio-Political Instability Approach
Echoes the hypothesis of the CMI Approach
Inequality is harmful for the growth process
Inequality =⇒ Socio-Political instability
Socio-Political instability =⇒ reduces the security of property rights=⇒ lower investment and slower economic growth (Alesina and Perotti (1996))
This channel is consistent with evidence (Perotti (1996))
Omer Ozak Inequality and Growth Growth & Comparative Development 9 / 73
![Page 44: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/44.jpg)
The Modern Perspective Socio-Political Instability
The Socio-Political Instability Approach
Echoes the hypothesis of the CMI Approach
Inequality is harmful for the growth process
Inequality =⇒ Socio-Political instability
Socio-Political instability =⇒ reduces the security of property rights=⇒ lower investment and slower economic growth (Alesina and Perotti (1996))
This channel is consistent with evidence (Perotti (1996))
Omer Ozak Inequality and Growth Growth & Comparative Development 9 / 73
![Page 45: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/45.jpg)
The Modern Perspective Gender Inequality
Gender Inequality
Gender inequality is harmful for the growth process
Galor-Weil (AER 1996)
Gender inequality reduces the opportunity cost of raising children more than
it reduces household income
=⇒ increases fertility
=⇒ reduces human capital investment (quantity-quality trade-off)
=⇒ lowers female labor force participation
=⇒ slows the growth process
Omer Ozak Inequality and Growth Growth & Comparative Development 10 / 73
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The Modern Perspective Gender Inequality
Gender Inequality
Gender inequality is harmful for the growth process
Galor-Weil (AER 1996)
Gender inequality reduces the opportunity cost of raising children more than
it reduces household income
=⇒ increases fertility
=⇒ reduces human capital investment (quantity-quality trade-off)
=⇒ lowers female labor force participation
=⇒ slows the growth process
Omer Ozak Inequality and Growth Growth & Comparative Development 10 / 73
![Page 47: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/47.jpg)
The Modern Perspective Gender Inequality
Gender Inequality
Gender inequality is harmful for the growth process
Galor-Weil (AER 1996)
Gender inequality reduces the opportunity cost of raising children more than
it reduces household income
=⇒ increases fertility
=⇒ reduces human capital investment (quantity-quality trade-off)
=⇒ lowers female labor force participation
=⇒ slows the growth process
Omer Ozak Inequality and Growth Growth & Comparative Development 10 / 73
![Page 48: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/48.jpg)
The Modern Perspective Gender Inequality
Gender Inequality
Gender inequality is harmful for the growth process
Galor-Weil (AER 1996)
Gender inequality reduces the opportunity cost of raising children more than
it reduces household income
=⇒ increases fertility
=⇒ reduces human capital investment (quantity-quality trade-off)
=⇒ lowers female labor force participation
=⇒ slows the growth process
Omer Ozak Inequality and Growth Growth & Comparative Development 10 / 73
![Page 49: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/49.jpg)
The Modern Perspective Gender Inequality
Gender Inequality
Gender inequality is harmful for the growth process
Galor-Weil (AER 1996)
Gender inequality reduces the opportunity cost of raising children more than
it reduces household income
=⇒ increases fertility
=⇒ reduces human capital investment (quantity-quality trade-off)
=⇒ lowers female labor force participation
=⇒ slows the growth process
Omer Ozak Inequality and Growth Growth & Comparative Development 10 / 73
![Page 50: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/50.jpg)
The Modern Perspective Gender Inequality
Gender Inequality
Gender inequality is harmful for the growth process
Galor-Weil (AER 1996)
Gender inequality reduces the opportunity cost of raising children more than
it reduces household income
=⇒ increases fertility
=⇒ reduces human capital investment (quantity-quality trade-off)
=⇒ lowers female labor force participation
=⇒ slows the growth process
Omer Ozak Inequality and Growth Growth & Comparative Development 10 / 73
![Page 51: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/51.jpg)
The Modern Perspective Gender Inequality
Gender Inequality
Gender inequality is harmful for the growth process
Galor-Weil (AER 1996)
Gender inequality reduces the opportunity cost of raising children more than
it reduces household income
=⇒ increases fertility
=⇒ reduces human capital investment (quantity-quality trade-off)
=⇒ lowers female labor force participation
=⇒ slows the growth process
Omer Ozak Inequality and Growth Growth & Comparative Development 10 / 73
![Page 52: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/52.jpg)
The Modern Perspective The Unified Approach
A unified theory of inequality and economic development
Galor and Moav (2004):
Captures the changing role of inequality in the growth process
Unifies the Classical and the Modern Paradigms
Provides an intertemporal reconciliation between conflicting viewpoints
about the effect of inequality on economic growth
Underlines the role of inequality in triggering socio-political transition
(Galor-Moav-Vollrath (2009), Galor-Moav (2006))
Omer Ozak Inequality and Growth Growth & Comparative Development 11 / 73
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The Modern Perspective The Unified Approach
A unified theory of inequality and economic development
Galor and Moav (2004):
Captures the changing role of inequality in the growth process
Unifies the Classical and the Modern Paradigms
Provides an intertemporal reconciliation between conflicting viewpoints
about the effect of inequality on economic growth
Underlines the role of inequality in triggering socio-political transition
(Galor-Moav-Vollrath (2009), Galor-Moav (2006))
Omer Ozak Inequality and Growth Growth & Comparative Development 11 / 73
![Page 54: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/54.jpg)
The Modern Perspective The Unified Approach
A unified theory of inequality and economic development
Galor and Moav (2004):
Captures the changing role of inequality in the growth process
Unifies the Classical and the Modern Paradigms
Provides an intertemporal reconciliation between conflicting viewpoints
about the effect of inequality on economic growth
Underlines the role of inequality in triggering socio-political transition
(Galor-Moav-Vollrath (2009), Galor-Moav (2006))
Omer Ozak Inequality and Growth Growth & Comparative Development 11 / 73
![Page 55: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/55.jpg)
The Modern Perspective The Unified Approach
A unified theory of inequality and economic development
Galor and Moav (2004):
Captures the changing role of inequality in the growth process
Unifies the Classical and the Modern Paradigms
Provides an intertemporal reconciliation between conflicting viewpoints
about the effect of inequality on economic growth
Underlines the role of inequality in triggering socio-political transition
(Galor-Moav-Vollrath (2009), Galor-Moav (2006))
Omer Ozak Inequality and Growth Growth & Comparative Development 11 / 73
![Page 56: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/56.jpg)
The Modern Perspective The Unified Approach
A unified theory of inequality and economic development
Galor and Moav (2004):
Captures the changing role of inequality in the growth process
Unifies the Classical and the Modern Paradigms
Provides an intertemporal reconciliation between conflicting viewpoints
about the effect of inequality on economic growth
Underlines the role of inequality in triggering socio-political transition
(Galor-Moav-Vollrath (2009), Galor-Moav (2006))
Omer Ozak Inequality and Growth Growth & Comparative Development 11 / 73
![Page 57: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/57.jpg)
The Modern Perspective The Unified Approach
A unified theory of inequality and economic development
Galor and Moav (2004):
Captures the changing role of inequality in the growth process
Unifies the Classical and the Modern Paradigms
Provides an intertemporal reconciliation between conflicting viewpoints
about the effect of inequality on economic growth
Underlines the role of inequality in triggering socio-political transition
(Galor-Moav-Vollrath (2009), Galor-Moav (2006))
Omer Ozak Inequality and Growth Growth & Comparative Development 11 / 73
![Page 58: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/58.jpg)
The Modern Perspective The Unified Approach
A Unified Theory of Inequality and Development
A unified theory of the dynamic implications of inequality on the growthprocess
Places the dominating modern theories within a broader unified struc-ture
Provides an intertemporal reconciliation between the Classical view-point and the Modern perspective
Omer Ozak Inequality and Growth Growth & Comparative Development 12 / 73
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The Modern Perspective The Unified Approach
A Unified Theory of Inequality and Development
A unified theory of the dynamic implications of inequality on the growthprocess
Places the dominating modern theories within a broader unified struc-ture
Provides an intertemporal reconciliation between the Classical view-point and the Modern perspective
Omer Ozak Inequality and Growth Growth & Comparative Development 12 / 73
![Page 60: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/60.jpg)
The Modern Perspective The Unified Approach
A Unified Theory of Inequality and Development
A unified theory of the dynamic implications of inequality on the growthprocess
Places the dominating modern theories within a broader unified struc-ture
Provides an intertemporal reconciliation between the Classical view-point and the Modern perspective
Omer Ozak Inequality and Growth Growth & Comparative Development 12 / 73
![Page 61: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/61.jpg)
The Modern Perspective The Unified Approach
A Unified Theory of Inequality and Development
A unified theory of the dynamic implications of inequality on the growthprocess
Places the dominating modern theories within a broader unified struc-ture
Provides an intertemporal reconciliation between the Classical view-point and the Modern perspective
Omer Ozak Inequality and Growth Growth & Comparative Development 12 / 73
![Page 62: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/62.jpg)
The Modern Perspective The Unified Approach
Main Hypothesis
The replacement of physical capital accumulation by human capital accu-
mulation as a prime engine of economic growth has changed the qualitative
impact of inequality on the process of development
Early stages of industrialization: physical capital accumulation is a main en-
gine of growth =⇒Inequality enhanced development by channeling resources towardsindividuals whose marginal propensity to save is higher
Later stages of development: the return to human capital increases due to
capital-skill complementarity and human capital became the prime engine of
growth =⇒Inequality, due to credit constraints, is harmful for growth
Omer Ozak Inequality and Growth Growth & Comparative Development 13 / 73
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The Modern Perspective The Unified Approach
Main Hypothesis
The replacement of physical capital accumulation by human capital accu-
mulation as a prime engine of economic growth has changed the qualitative
impact of inequality on the process of development
Early stages of industrialization: physical capital accumulation is a main en-
gine of growth =⇒Inequality enhanced development by channeling resources towardsindividuals whose marginal propensity to save is higher
Later stages of development: the return to human capital increases due to
capital-skill complementarity and human capital became the prime engine of
growth =⇒Inequality, due to credit constraints, is harmful for growth
Omer Ozak Inequality and Growth Growth & Comparative Development 13 / 73
![Page 64: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/64.jpg)
The Modern Perspective The Unified Approach
Main Hypothesis
The replacement of physical capital accumulation by human capital accu-
mulation as a prime engine of economic growth has changed the qualitative
impact of inequality on the process of development
Early stages of industrialization: physical capital accumulation is a main en-
gine of growth =⇒Inequality enhanced development by channeling resources towardsindividuals whose marginal propensity to save is higher
Later stages of development: the return to human capital increases due to
capital-skill complementarity and human capital became the prime engine of
growth =⇒Inequality, due to credit constraints, is harmful for growth
Omer Ozak Inequality and Growth Growth & Comparative Development 13 / 73
![Page 65: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/65.jpg)
The Modern Perspective The Unified Approach
Main Hypothesis
The replacement of physical capital accumulation by human capital accu-
mulation as a prime engine of economic growth has changed the qualitative
impact of inequality on the process of development
Early stages of industrialization: physical capital accumulation is a main en-
gine of growth =⇒Inequality enhanced development by channeling resources towardsindividuals whose marginal propensity to save is higher
Later stages of development: the return to human capital increases due to
capital-skill complementarity and human capital became the prime engine of
growth =⇒Inequality, due to credit constraints, is harmful for growth
Omer Ozak Inequality and Growth Growth & Comparative Development 13 / 73
![Page 66: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/66.jpg)
The Modern Perspective The Unified Approach
Main Hypothesis
The replacement of physical capital accumulation by human capital accu-
mulation as a prime engine of economic growth has changed the qualitative
impact of inequality on the process of development
Early stages of industrialization: physical capital accumulation is a main en-
gine of growth =⇒Inequality enhanced development by channeling resources towardsindividuals whose marginal propensity to save is higher
Later stages of development: the return to human capital increases due to
capital-skill complementarity and human capital became the prime engine of
growth =⇒Inequality, due to credit constraints, is harmful for growth
Omer Ozak Inequality and Growth Growth & Comparative Development 13 / 73
![Page 67: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/67.jpg)
The Modern Perspective The Unified Approach
Main Hypothesis
The replacement of physical capital accumulation by human capital accu-
mulation as a prime engine of economic growth has changed the qualitative
impact of inequality on the process of development
Early stages of industrialization: physical capital accumulation is a main en-
gine of growth =⇒Inequality enhanced development by channeling resources towardsindividuals whose marginal propensity to save is higher
Later stages of development: the return to human capital increases due to
capital-skill complementarity and human capital became the prime engine of
growth =⇒Inequality, due to credit constraints, is harmful for growth
Omer Ozak Inequality and Growth Growth & Comparative Development 13 / 73
![Page 68: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/68.jpg)
The Modern Perspective The Unified Approach
Central Argument
Fundamental asymmetry between:
Human capital accumulation
Physical capital accumulation
Omer Ozak Inequality and Growth Growth & Comparative Development 14 / 73
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The Modern Perspective The Unified Approach
Central Argument
Fundamental asymmetry between:
Human capital accumulation
Physical capital accumulation
Omer Ozak Inequality and Growth Growth & Comparative Development 14 / 73
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The Modern Perspective The Unified Approach
Central Argument
Fundamental asymmetry between:
Human capital accumulation
Physical capital accumulation
Omer Ozak Inequality and Growth Growth & Comparative Development 14 / 73
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The Modern Perspective The Unified Approach
Central Argument
Fundamental asymmetry between:
Human capital accumulation
Physical capital accumulation
Omer Ozak Inequality and Growth Growth & Comparative Development 14 / 73
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The Modern Perspective The Unified Approach
Human Capital vs. Physical Capital Accumulation
Human capital is embodied in humans =⇒
Physiological constraints subjects its accumulation at the individuallevel to diminishing returns
The accumulation of human capital would be larger if it would bewidely distributed among individuals in society
Physical capital is not embodied in humans =⇒
Physical capital accumulation may benefit from the concentration ofwealth among individuals whose marginal propensity to save is larger
Omer Ozak Inequality and Growth Growth & Comparative Development 15 / 73
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The Modern Perspective The Unified Approach
Human Capital vs. Physical Capital Accumulation
Human capital is embodied in humans =⇒
Physiological constraints subjects its accumulation at the individuallevel to diminishing returns
The accumulation of human capital would be larger if it would bewidely distributed among individuals in society
Physical capital is not embodied in humans =⇒
Physical capital accumulation may benefit from the concentration ofwealth among individuals whose marginal propensity to save is larger
Omer Ozak Inequality and Growth Growth & Comparative Development 15 / 73
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The Modern Perspective The Unified Approach
Human Capital vs. Physical Capital Accumulation
Human capital is embodied in humans =⇒
Physiological constraints subjects its accumulation at the individuallevel to diminishing returns
The accumulation of human capital would be larger if it would bewidely distributed among individuals in society
Physical capital is not embodied in humans =⇒
Physical capital accumulation may benefit from the concentration ofwealth among individuals whose marginal propensity to save is larger
Omer Ozak Inequality and Growth Growth & Comparative Development 15 / 73
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The Modern Perspective The Unified Approach
Human Capital vs. Physical Capital Accumulation
Human capital is embodied in humans =⇒
Physiological constraints subjects its accumulation at the individuallevel to diminishing returns
The accumulation of human capital would be larger if it would bewidely distributed among individuals in society
Physical capital is not embodied in humans =⇒
Physical capital accumulation may benefit from the concentration ofwealth among individuals whose marginal propensity to save is larger
Omer Ozak Inequality and Growth Growth & Comparative Development 15 / 73
![Page 76: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/76.jpg)
The Modern Perspective The Unified Approach
Human Capital vs. Physical Capital Accumulation
Human capital is embodied in humans =⇒
Physiological constraints subjects its accumulation at the individuallevel to diminishing returns
The accumulation of human capital would be larger if it would bewidely distributed among individuals in society
Physical capital is not embodied in humans =⇒
Physical capital accumulation may benefit from the concentration ofwealth among individuals whose marginal propensity to save is larger
Omer Ozak Inequality and Growth Growth & Comparative Development 15 / 73
![Page 77: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/77.jpg)
The Modern Perspective The Unified Approach
Human Capital vs. Physical Capital Accumulation
Human capital is embodied in humans =⇒
Physiological constraints subjects its accumulation at the individuallevel to diminishing returns
The accumulation of human capital would be larger if it would bewidely distributed among individuals in society
Physical capital is not embodied in humans =⇒
Physical capital accumulation may benefit from the concentration ofwealth among individuals whose marginal propensity to save is larger
Omer Ozak Inequality and Growth Growth & Comparative Development 15 / 73
![Page 78: Inequality and the Process of Development · Inequality is bene cial for growth (in the post-industrialization stage) Keynes (1920), Kaldor (1957) ... to save is higher =)increases](https://reader035.vdocuments.us/reader035/viewer/2022071116/5fff86f6f4f67a24985d4617/html5/thumbnails/78.jpg)
The Modern Perspective The Unified Approach
Inequality and Physical and Human Capital Accumulation
Inequality is conducive for physical capital accumulation, as long asthe marginal propensity to save rises with income
Inequality is harmful for human capital accumulation, as long ascredit constraints are binding
Omer Ozak Inequality and Growth Growth & Comparative Development 16 / 73
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The Modern Perspective The Unified Approach
Inequality and Physical and Human Capital Accumulation
Inequality is conducive for physical capital accumulation, as long asthe marginal propensity to save rises with income
Inequality is harmful for human capital accumulation, as long ascredit constraints are binding
Omer Ozak Inequality and Growth Growth & Comparative Development 16 / 73
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The Modern Perspective The Unified Approach
Inequality and Physical and Human Capital Accumulation
Inequality is conducive for physical capital accumulation, as long asthe marginal propensity to save rises with income
Inequality is harmful for human capital accumulation, as long ascredit constraints are binding
Omer Ozak Inequality and Growth Growth & Comparative Development 16 / 73
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The Modern Perspective The Unified Approach
Inequality and Growth in Different Stages of Development
Inequality stimulates economic growth in stages of development inwhich physical capital accumulation is the prime engine of growth
Inequality is harmful for economic growth in stages of development inwhich human capital accumulation is the prime engine of economicgrowth and credit constraints are still binding
Omer Ozak Inequality and Growth Growth & Comparative Development 17 / 73
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The Modern Perspective The Unified Approach
Inequality and Growth in Different Stages of Development
Inequality stimulates economic growth in stages of development inwhich physical capital accumulation is the prime engine of growth
Inequality is harmful for economic growth in stages of development inwhich human capital accumulation is the prime engine of economicgrowth and credit constraints are still binding
Omer Ozak Inequality and Growth Growth & Comparative Development 17 / 73
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The Modern Perspective The Unified Approach
Inequality and Growth in Different Stages of Development
Inequality stimulates economic growth in stages of development inwhich physical capital accumulation is the prime engine of growth
Inequality is harmful for economic growth in stages of development inwhich human capital accumulation is the prime engine of economicgrowth and credit constraints are still binding
Omer Ozak Inequality and Growth Growth & Comparative Development 17 / 73
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The Galor-Zeira Model
The Galor-Zeira Model
Overlapping-Generations economy
t = 0, 1, 2, 3, ...
One good
3 factors:
K ≡ Physical capital
Ls ≡ Skilled Labor
Lu ≡ Unskilled Labor
Omer Ozak Inequality and Growth Growth & Comparative Development 18 / 73
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The Galor-Zeira Model
The Galor-Zeira Model
Overlapping-Generations economy
t = 0, 1, 2, 3, ...
One good
3 factors:
K ≡ Physical capital
Ls ≡ Skilled Labor
Lu ≡ Unskilled Labor
Omer Ozak Inequality and Growth Growth & Comparative Development 18 / 73
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The Galor-Zeira Model
The Galor-Zeira Model
Overlapping-Generations economy
t = 0, 1, 2, 3, ...
One good
3 factors:
K ≡ Physical capital
Ls ≡ Skilled Labor
Lu ≡ Unskilled Labor
Omer Ozak Inequality and Growth Growth & Comparative Development 18 / 73
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The Galor-Zeira Model
The Galor-Zeira Model
Overlapping-Generations economy
t = 0, 1, 2, 3, ...
One good
3 factors:
K ≡ Physical capital
Ls ≡ Skilled Labor
Lu ≡ Unskilled Labor
Omer Ozak Inequality and Growth Growth & Comparative Development 18 / 73
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The Galor-Zeira Model
The Galor-Zeira Model
Overlapping-Generations economy
t = 0, 1, 2, 3, ...
One good
3 factors:
K ≡ Physical capital
Ls ≡ Skilled Labor
Lu ≡ Unskilled Labor
Omer Ozak Inequality and Growth Growth & Comparative Development 18 / 73
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The Galor-Zeira Model
The Galor-Zeira Model
Overlapping-Generations economy
t = 0, 1, 2, 3, ...
One good
3 factors:
K ≡ Physical capital
Ls ≡ Skilled Labor
Lu ≡ Unskilled Labor
Omer Ozak Inequality and Growth Growth & Comparative Development 18 / 73
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The Galor-Zeira Model
The Galor-Zeira Model
Overlapping-Generations economy
t = 0, 1, 2, 3, ...
One good
3 factors:
K ≡ Physical capital
Ls ≡ Skilled Labor
Lu ≡ Unskilled Labor
Omer Ozak Inequality and Growth Growth & Comparative Development 18 / 73
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The Galor-Zeira Model
The Galor-Zeira Model
Overlapping-Generations economy
t = 0, 1, 2, 3, ...
One good
3 factors:
K ≡ Physical capital
Ls ≡ Skilled Labor
Lu ≡ Unskilled Labor
Omer Ozak Inequality and Growth Growth & Comparative Development 18 / 73
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The Galor-Zeira Model
Production
Total output producedYt = Y s
t + Y ut
Production in the skilled-intensive sector:
Y st = F (Kt , L
st ) ≡ Lst f (kt); kt ≡ Kt/L
st
Production in the unskilled-intensive sector:
Y ut = aLut
Omer Ozak Inequality and Growth Growth & Comparative Development 19 / 73
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The Galor-Zeira Model
Production
Total output producedYt = Y s
t + Y ut
Production in the skilled-intensive sector:
Y st = F (Kt , L
st ) ≡ Lst f (kt); kt ≡ Kt/L
st
Production in the unskilled-intensive sector:
Y ut = aLut
Omer Ozak Inequality and Growth Growth & Comparative Development 19 / 73
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The Galor-Zeira Model
Production
Total output producedYt = Y s
t + Y ut
Production in the skilled-intensive sector:
Y st = F (Kt , L
st ) ≡ Lst f (kt); kt ≡ Kt/L
st
Production in the unskilled-intensive sector:
Y ut = aLut
Omer Ozak Inequality and Growth Growth & Comparative Development 19 / 73
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The Galor-Zeira Model
Production
Total output producedYt = Y s
t + Y ut
Production in the skilled-intensive sector:
Y st = F (Kt , L
st ) ≡ Lst f (kt); kt ≡ Kt/L
st
Production in the unskilled-intensive sector:
Y ut = aLut
Omer Ozak Inequality and Growth Growth & Comparative Development 19 / 73
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The Galor-Zeira Model
Inverse Demand for Factors
Capital:rt = f ′(kt) ≡ r(kt)
Skilled labor:w st = f (kt)− f ′(kt)kt ≡ w s(kt)
Unskilled labor:wut = a ≡ wu
Omer Ozak Inequality and Growth Growth & Comparative Development 20 / 73
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The Galor-Zeira Model
Inverse Demand for Factors
Capital:rt = f ′(kt) ≡ r(kt)
Skilled labor:w st = f (kt)− f ′(kt)kt ≡ w s(kt)
Unskilled labor:wut = a ≡ wu
Omer Ozak Inequality and Growth Growth & Comparative Development 20 / 73
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The Galor-Zeira Model
Inverse Demand for Factors
Capital:rt = f ′(kt) ≡ r(kt)
Skilled labor:w st = f (kt)− f ′(kt)kt ≡ w s(kt)
Unskilled labor:wut = a ≡ wu
Omer Ozak Inequality and Growth Growth & Comparative Development 20 / 73
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The Galor-Zeira Model
Factor Prices
Small open economy
World interest = r
=⇒rt = r
kt = f ′−1(r) ≡ k
w st = w s(k) ≡ w s
=⇒(rt ,w
st ,w
ut ) = (r ,w s ,wu) ∀t
Omer Ozak Inequality and Growth Growth & Comparative Development 21 / 73
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The Galor-Zeira Model
Factor Prices
Small open economy
World interest = r
=⇒rt = r
kt = f ′−1(r) ≡ k
w st = w s(k) ≡ w s
=⇒(rt ,w
st ,w
ut ) = (r ,w s ,wu) ∀t
Omer Ozak Inequality and Growth Growth & Comparative Development 21 / 73
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The Galor-Zeira Model
Factor Prices
Small open economy
World interest = r
=⇒rt = r
kt = f ′−1(r) ≡ k
w st = w s(k) ≡ w s
=⇒(rt ,w
st ,w
ut ) = (r ,w s ,wu) ∀t
Omer Ozak Inequality and Growth Growth & Comparative Development 21 / 73
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The Galor-Zeira Model
Factor Prices
Small open economy
World interest = r
=⇒rt = r
kt = f ′−1(r) ≡ k
w st = w s(k) ≡ w s
=⇒(rt ,w
st ,w
ut ) = (r ,w s ,wu) ∀t
Omer Ozak Inequality and Growth Growth & Comparative Development 21 / 73
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The Galor-Zeira Model Individuals
Individuals
Continuum of measure 1
Each Individual has 1 parent and 1 child
Identical in:
Preferences
Innate abilities
Differ in:
Parental income ⇒ Inv’t in HC
Omer Ozak Inequality and Growth Growth & Comparative Development 22 / 73
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The Galor-Zeira Model Individuals
Individuals
Continuum of measure 1
Each Individual has 1 parent and 1 child
Identical in:
Preferences
Innate abilities
Differ in:
Parental income ⇒ Inv’t in HC
Omer Ozak Inequality and Growth Growth & Comparative Development 22 / 73
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The Galor-Zeira Model Individuals
Individuals
Continuum of measure 1
Each Individual has 1 parent and 1 child
Identical in:
Preferences
Innate abilities
Differ in:
Parental income ⇒ Inv’t in HC
Omer Ozak Inequality and Growth Growth & Comparative Development 22 / 73
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The Galor-Zeira Model Individuals
Individuals
Continuum of measure 1
Each Individual has 1 parent and 1 child
Identical in:
Preferences
Innate abilities
Differ in:
Parental income ⇒ Inv’t in HC
Omer Ozak Inequality and Growth Growth & Comparative Development 22 / 73
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The Galor-Zeira Model Individuals
Individuals
Continuum of measure 1
Each Individual has 1 parent and 1 child
Identical in:
Preferences
Innate abilities
Differ in:
Parental income ⇒ Inv’t in HC
Omer Ozak Inequality and Growth Growth & Comparative Development 22 / 73
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The Galor-Zeira Model Individuals
Member of Generation t: Period of Life
First period of life (Period t):
[invest in HC] or [work as unskilled]
Second period of life (Period t + 1):
[work as unskilled / no inv’t in HC] or [work as skilled / inv’t in HC in1st period]
Omer Ozak Inequality and Growth Growth & Comparative Development 23 / 73
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The Galor-Zeira Model Individuals
Member of Generation t: Period of Life
First period of life (Period t):
[invest in HC] or [work as unskilled]
Second period of life (Period t + 1):
[work as unskilled / no inv’t in HC] or [work as skilled / inv’t in HC in1st period]
Omer Ozak Inequality and Growth Growth & Comparative Development 23 / 73
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The Galor-Zeira Model Individuals
Member of Generation t: Period of Life
First period of life (Period t):
[invest in HC] or [work as unskilled]
Second period of life (Period t + 1):
[work as unskilled / no inv’t in HC] or [work as skilled / inv’t in HC in1st period]
Omer Ozak Inequality and Growth Growth & Comparative Development 23 / 73
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The Galor-Zeira Model Individuals
Member of Generation t: Endowment and Preferences
Time endowment:
1 units of time in each period
Capital endowment:
bt ≡ capital inherited in 1st period
Preferences:
ut = α ln ct+1 + (1− α) ln bt+1 α ∈ (0, 1)
Omer Ozak Inequality and Growth Growth & Comparative Development 24 / 73
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The Galor-Zeira Model Individuals
Member of Generation t: Endowment and Preferences
Time endowment:
1 units of time in each period
Capital endowment:
bt ≡ capital inherited in 1st period
Preferences:
ut = α ln ct+1 + (1− α) ln bt+1 α ∈ (0, 1)
Omer Ozak Inequality and Growth Growth & Comparative Development 24 / 73
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The Galor-Zeira Model Individuals
Member of Generation t: Endowment and Preferences
Time endowment:
1 units of time in each period
Capital endowment:
bt ≡ capital inherited in 1st period
Preferences:
ut = α ln ct+1 + (1− α) ln bt+1 α ∈ (0, 1)
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The Galor-Zeira Model Individuals
Member of Generation t: Endowment and Preferences
Time endowment:
1 units of time in each period
Capital endowment:
bt ≡ capital inherited in 1st period
Preferences:
ut = α ln ct+1 + (1− α) ln bt+1 α ∈ (0, 1)
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The Galor-Zeira Model Individuals
Member of Generation t: Budget Constraint
Second period budget constraint:
ct+1 + bt+1 ≤ ωt+1
ct+1 ≡ consumption
bt+1 ≡ transfers to offspring
ωt+1 ≡ wealth in period t + 1
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The Galor-Zeira Model Individuals
Member of Generation t: Budget Constraint
Second period budget constraint:
ct+1 + bt+1 ≤ ωt+1
ct+1 ≡ consumption
bt+1 ≡ transfers to offspring
ωt+1 ≡ wealth in period t + 1
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The Galor-Zeira Model Individuals
Member of Generation t: Budget Constraint
Second period budget constraint:
ct+1 + bt+1 ≤ ωt+1
ct+1 ≡ consumption
bt+1 ≡ transfers to offspring
ωt+1 ≡ wealth in period t + 1
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The Galor-Zeira Model Individuals
Member of Generation t: Budget Constraint
Second period budget constraint:
ct+1 + bt+1 ≤ ωt+1
ct+1 ≡ consumption
bt+1 ≡ transfers to offspring
ωt+1 ≡ wealth in period t + 1
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The Galor-Zeira Model Individuals
Member of Generation t: Optimization
{ct+1, bt+1} = arg max[α ln ct+1 + (1− α) ln bt+1]
s.t. ct+1 + bt+1 ≤ ωt+1
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The Galor-Zeira Model Individuals
Member of Generation t: Optimization
bt+1 = (1− α)ωt+1
ct+1 = αωt+1
Indirect Utility: =⇒
v t = α lnαωt+1 + (1− α) lnωt+1
= [α lnα + (1− α) ln(1− α)] + lnωt+1
=⇒ v t is monotonic increasing in 2nd period wealth, ωt+1
=⇒ maximization of ωt+1, is the basis of occupational choices
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The Galor-Zeira Model Individuals
Member of Generation t: Optimization
bt+1 = (1− α)ωt+1
ct+1 = αωt+1
Indirect Utility: =⇒
v t = α lnαωt+1 + (1− α) lnωt+1
= [α lnα + (1− α) ln(1− α)] + lnωt+1
=⇒ v t is monotonic increasing in 2nd period wealth, ωt+1
=⇒ maximization of ωt+1, is the basis of occupational choices
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The Galor-Zeira Model Individuals
Member of Generation t: Optimization
bt+1 = (1− α)ωt+1
ct+1 = αωt+1
Indirect Utility: =⇒
v t = α lnαωt+1 + (1− α) lnωt+1
= [α lnα + (1− α) ln(1− α)] + lnωt+1
=⇒ v t is monotonic increasing in 2nd period wealth, ωt+1
=⇒ maximization of ωt+1, is the basis of occupational choices
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The Galor-Zeira Model Individuals
Member of Generation t: Optimization
bt+1 = (1− α)ωt+1
ct+1 = αωt+1
Indirect Utility: =⇒
v t = α lnαωt+1 + (1− α) lnωt+1
= [α lnα + (1− α) ln(1− α)] + lnωt+1
=⇒ v t is monotonic increasing in 2nd period wealth, ωt+1
=⇒ maximization of ωt+1, is the basis of occupational choices
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The Galor-Zeira Model Individuals
Member of Generation t: Optimization
bt+1 = (1− α)ωt+1
ct+1 = αωt+1
Indirect Utility: =⇒
v t = α lnαωt+1 + (1− α) lnωt+1
= [α lnα + (1− α) ln(1− α)] + lnωt+1
=⇒ v t is monotonic increasing in 2nd period wealth, ωt+1
=⇒ maximization of ωt+1, is the basis of occupational choices
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The Galor-Zeira Model Occupational Choice
Fundamental Assumptions
Imperfect Capital Markets:r < i (A1)
r ≡ interest rate for lender
i ≡ interest rate for borrowers (for inv’t in HC)
Fixed cost of education (Indivisibility of inv’t in HC) Weighted average of the
payments to teachers, administrators, and maintenance workers in the school system (i.e., weighted average of the
wages skilled and unskilled workers):
CH = θw s + (1− θ)wu ≡ h > 0 θ ∈ [0, 1] (A2)
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The Galor-Zeira Model Occupational Choice
Fundamental Assumptions
Imperfect Capital Markets:r < i (A1)
r ≡ interest rate for lender
i ≡ interest rate for borrowers (for inv’t in HC)
Fixed cost of education (Indivisibility of inv’t in HC) Weighted average of the
payments to teachers, administrators, and maintenance workers in the school system (i.e., weighted average of the
wages skilled and unskilled workers):
CH = θw s + (1− θ)wu ≡ h > 0 θ ∈ [0, 1] (A2)
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The Galor-Zeira Model Occupational Choice
Income: Unskilled Individuals
ωut+1 = (wu + bt)(1 + r) + wu
= wu(2 + r) + (1 + r)bt
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The Galor-Zeira Model Occupational Choice
Income: Unskilled Individuals
ωut+1 = (wu + bt)(1 + r) + wu
= wu(2 + r) + (1 + r)bt
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The Galor-Zeira Model Occupational Choice
Income: Unskilled Individuals
ωut+1 = (wu + bt)(1 + r) + wu
= wu(2 + r) + (1 + r)bt
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The Galor-Zeira Model Occupational Choice
Income: Skilled Individuals
ωst+1 =
w s − (h − bt)(1 + i) if bt ≤ h
w s + (bt − h)(1 + r) if bt ≥ h
=⇒
ωst+1 =
w s − (1 + i)h + (1 + i)bt if bt ≤ h
w s − (1 + r)h + (1 + r)bt if bt ≥ h
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The Galor-Zeira Model Occupational Choice
Income: Skilled Individuals
ωst+1 =
w s − (h − bt)(1 + i) if bt ≤ h
w s + (bt − h)(1 + r) if bt ≥ h
=⇒
ωst+1 =
w s − (1 + i)h + (1 + i)bt if bt ≤ h
w s − (1 + r)h + (1 + r)bt if bt ≥ h
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The Galor-Zeira Model Occupational Choice
Assumptions
Investment in human capital is not beneficial for individuals who mustfinance the entire cost of education via borrowing
w s − (1 + i)h < 0 (A3)
Investment in human capital is beneficial for individuals who canfinance the entire cost of education without borrowing
w s − (1 + r)h > wu(2 + r) (A4)
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The Galor-Zeira Model Occupational Choice
Assumptions
Investment in human capital is not beneficial for individuals who mustfinance the entire cost of education via borrowing
w s − (1 + i)h < 0 (A3)
Investment in human capital is beneficial for individuals who canfinance the entire cost of education without borrowing
w s − (1 + r)h > wu(2 + r) (A4)
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The Galor-Zeira Model Occupational Choice
Income from Being Unskilled Worker
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The Galor-Zeira Model Occupational Choice
Income from Being Unskilled Worker
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The Galor-Zeira Model Occupational Choice
Income from Being Skilled Worker: Borrowers
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The Galor-Zeira Model Occupational Choice
Income from Being Skilled Worker: Borrowers
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The Galor-Zeira Model Occupational Choice
Income from Being Skilled Worker: Borrowers
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The Galor-Zeira Model Occupational Choice
Income from Being Skilled Worker: Borrowers
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The Galor-Zeira Model Occupational Choice
Income from Being Skilled Worker: Lenders
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The Galor-Zeira Model Occupational Choice
Bequest and Occupational Choice
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The Galor-Zeira Model Occupational Choice
Bequest and Occupational Choice
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The Galor-Zeira Model Occupational Choice
Bequest and Occupational Choice
bt
< f → xut+1 > x st+1 (individual t becomes unskilled)
> f → xut+1 < x st+1 (individual t becomes skilled)
where
f =wu(2 + r)− [w s − (1 + i)h]
i − r> 0
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The Galor-Zeira Model Occupational Choice
Bequest and Occupational Choice
bt
< f → xut+1 > x st+1 (individual t becomes unskilled)
> f → xut+1 < x st+1 (individual t becomes skilled)
where
f =wu(2 + r)− [w s − (1 + i)h]
i − r> 0
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The Galor-Zeira Model Bequest Dynamics
Bequest Dynamics
bt+1 = (1− α)xt+1
bt+1 =
(1− α)[wu(2 + r) + (1 + r)bt ] bt ∈ [0, f ]
(1− α)[w s − (1 + i)h + (1 + i)bt ] bt ∈ [f , h]
(1− α)[w s − (1 + r)h + (1 + r)bt ] bt ∈ [h,∞]
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The Galor-Zeira Model Bequest Dynamics
Bequest Dynamics
bt+1 = (1− α)xt+1
bt+1 =
(1− α)[wu(2 + r) + (1 + r)bt ] bt ∈ [0, f ]
(1− α)[w s − (1 + i)h + (1 + i)bt ] bt ∈ [f , h]
(1− α)[w s − (1 + r)h + (1 + r)bt ] bt ∈ [h,∞]
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The Galor-Zeira Model Bequest Dynamics
Bequest Dynamics: Sufficiet Conditions for Multiplicity of Steady-Sate
(1− α)(1 + r) < 1
(1− α)(1 + i) > 1(A5)
(1− α)w s > h (A6)
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The Galor-Zeira Model Bequest Dynamics
Bequest Dynamics
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The Galor-Zeira Model Bequest Dynamics
Bequest Dynamics: Multiple Steady-State Equilibrium
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The Galor-Zeira Model Bequest Dynamics
Bequest Dynamics: Stability of High Bequest Equilibrium
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The Galor-Zeira Model Bequest Dynamics
Bequest Dynamics: Stability of Steady- State Equilibria
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The Galor-Zeira Model Inequality and Skill Composition
The Distribution of the Inheritance in Period t
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The Galor-Zeira Model Inequality and Skill Composition
Income Distribution and the Long Run Decomposition of the Labor Force
ξt(bt) ≡ Distribution of inheritance at time t
=⇒
Lt =
∫ ∞0
ξ(bt)dbt ≡ 1
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The Galor-Zeira Model Inequality and Skill Composition
The Distribution of the Inheritance in Period t
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The Galor-Zeira Model Inequality and Skill Composition
Income Distribution of the Long Run Decomposition of the Labor Force
limt→∞ lut =∫ g
0 ξt(bt)dbt ≡ lu
limt→∞ l st =∫∞g ξt(bt)dbt ≡ l s
where∂ l s/∂g < 0
and
g =(1− α)[(1 + i)h − w s ]
(1− α)(1 + i)− 1> 0
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The Galor-Zeira Model Inequality and Skill Composition
Income Distribution of the Long Run Decomposition of the Labor Force
limt→∞ lut =∫ g
0 ξt(bt)dbt ≡ lu
limt→∞ l st =∫∞g ξt(bt)dbt ≡ l s
where∂ l s/∂g < 0
and
g =(1− α)[(1 + i)h − w s ]
(1− α)(1 + i)− 1> 0
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The Galor-Zeira Model Inequality and Skill Composition
Income Distribution of the Long Run Decomposition of the Labor Force
limt→∞ lut =∫ g
0 ξt(bt)dbt ≡ lu
limt→∞ l st =∫∞g ξt(bt)dbt ≡ l s
where∂ l s/∂g < 0
and
g =(1− α)[(1 + i)h − w s ]
(1− α)(1 + i)− 1> 0
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The Galor-Zeira Model Inequality and Skill Composition
Income Distribution of Skill Composition
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The Galor-Zeira Model Inequality and Skill Composition
Income Distribution of Skill Composition
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The Galor-Zeira Model Skill Composition and Income Per Capita
Income Per Capita in the Long Run
Income of a skilled individual in the second period of life (wage and capital
income)
I s2 = w s + (bs − h)r
Income of an unskilled individual in the second period of life (wage and
capital income)
I u2 = wu + (bu + wu)r
Income of an unskilled individual in the first period of life (only wage income)
I u1 = wu
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The Galor-Zeira Model Skill Composition and Income Per Capita
Income Per Capita in the Long Run
Income of a skilled individual in the second period of life (wage and capital
income)
I s2 = w s + (bs − h)r
Income of an unskilled individual in the second period of life (wage and
capital income)
I u2 = wu + (bu + wu)r
Income of an unskilled individual in the first period of life (only wage income)
I u1 = wu
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The Galor-Zeira Model Skill Composition and Income Per Capita
Income Per Capita in the Long Run
Income of a skilled individual in the second period of life (wage and capital
income)
I s2 = w s + (bs − h)r
Income of an unskilled individual in the second period of life (wage and
capital income)
I u2 = wu + (bu + wu)r
Income of an unskilled individual in the first period of life (only wage income)
I u1 = wu
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The Galor-Zeira Model Skill Composition and Income Per Capita
Income Per Capita in the Long Run
Aggregate income in the steady-state
Y = I s2 ls + I u2 l
u + I u1 lu
Aggregate income (note: l s + lu = 1)
Y = [w s − rh + r bs ]l s + [wu(2 + r) + r bu](1− l s)
= wu(2 + r) + r bu + [(w s − rh)− wu(2 + r) + (bs − bu)]l s
Income per capitay = Y /2
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The Galor-Zeira Model Skill Composition and Income Per Capita
Income Per Capita in the Long Run
Aggregate income in the steady-state
Y = I s2 ls + I u2 l
u + I u1 lu
Aggregate income (note: l s + lu = 1)
Y = [w s − rh + r bs ]l s + [wu(2 + r) + r bu](1− l s)
= wu(2 + r) + r bu + [(w s − rh)− wu(2 + r) + (bs − bu)]l s
Income per capitay = Y /2
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The Galor-Zeira Model Skill Composition and Income Per Capita
Income Per Capita in the Long Run
Aggregate income in the steady-state
Y = I s2 ls + I u2 l
u + I u1 lu
Aggregate income (note: l s + lu = 1)
Y = [w s − rh + r bs ]l s + [wu(2 + r) + r bu](1− l s)
= wu(2 + r) + r bu + [(w s − rh)− wu(2 + r) + (bs − bu)]l s
Income per capitay = Y /2
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The Galor-Zeira Model Skill Composition and Income Per Capita
Skill Composition and Income Per Capita in the Long Run
An increase in the fraction of skilled workers increases income percapita in the steady-state
∂y
∂ l s= [(w s − rh)− wu(2 + r) + (bs − bu)]/2 > 0
sincew s − (1 + r)h > wu(2 + r)
bs > bu
An increase in g reduces income per capita in the steady-state
∂y
∂g=∂y
∂ l s∂ l s
∂g< 0
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The Galor-Zeira Model Skill Composition and Income Per Capita
Skill Composition and Income Per Capita in the Long Run
An increase in the fraction of skilled workers increases income percapita in the steady-state
∂y
∂ l s= [(w s − rh)− wu(2 + r) + (bs − bu)]/2 > 0
sincew s − (1 + r)h > wu(2 + r)
bs > bu
An increase in g reduces income per capita in the steady-state
∂y
∂g=∂y
∂ l s∂ l s
∂g< 0
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The Galor-Zeira Model Skill Composition and Income Per Capita
Skill Composition and Income Per Capita in the Long Run
An increase in the fraction of skilled workers increases income percapita in the steady-state
∂y
∂ l s= [(w s − rh)− wu(2 + r) + (bs − bu)]/2 > 0
sincew s − (1 + r)h > wu(2 + r)
bs > bu
An increase in g reduces income per capita in the steady-state
∂y
∂g=∂y
∂ l s∂ l s
∂g< 0
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Inequality and Economic Development
Inequality and Development: Rich Economies
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Inequality and Economic Development
Rich Economies: Inequality is Harmful for Development
Inequality reduces human capital formation
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Inequality and Economic Development
Rich Economies: Inequality is Harmful for Development
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Inequality and Economic Development
Rich Economies: Inequality is Harmful for Development
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Inequality and Economic Development
Inequality and Development: Poor Economies
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Inequality and Economic Development
Poor Economies: Inequality may Benefit Development
Inequality stimulates human capital formation
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Inequality and Economic Development
Poor Economies: Inequality may Benefit Development
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Inequality and Economic Development Robustness
Robustness
The qualitative results are robust to:
Education cost that is indexed to wages
Labor augmenting technical change
Shocks the outcome of investment in human capital, as long as wagesare endogenous
Concave production function of human capital (Moav (EL, 2002),
Galor-Moav (RES, 2004))
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Inequality and Economic Development Robustness
Robustness
The qualitative results are robust to:
Education cost that is indexed to wages
Labor augmenting technical change
Shocks the outcome of investment in human capital, as long as wagesare endogenous
Concave production function of human capital (Moav (EL, 2002),
Galor-Moav (RES, 2004))
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Inequality and Economic Development Robustness
Robustness
The qualitative results are robust to:
Education cost that is indexed to wages
Labor augmenting technical change
Shocks the outcome of investment in human capital, as long as wagesare endogenous
Concave production function of human capital (Moav (EL, 2002),
Galor-Moav (RES, 2004))
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Inequality and Economic Development Robustness
Robustness
The qualitative results are robust to:
Education cost that is indexed to wages
Labor augmenting technical change
Shocks the outcome of investment in human capital, as long as wagesare endogenous
Concave production function of human capital (Moav (EL, 2002),
Galor-Moav (RES, 2004))
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Inequality and Economic Development Robustness
Robustness: Technological Progress and Endogenous Education Cost
Labor Augmenting Technological Progress: increases the productivity of
workers in both the skilled-intensive and the unskilled intensive sector.
Production in the skilled-intensive sector
Y st = F (Kt ,AtL
st ) ≡ AtL
st f (kt); kt ≡ Kt/AtL
st
Production in the unskilled-intensive sector
Y ut = AtaL
ut
Technological progress
At+1 = (1 + λ)At λ > 0.
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Inequality and Economic Development Robustness
Robustness: Technological Progress and Endogenous Education Cost
Labor Augmenting Technological Progress: increases the productivity of
workers in both the skilled-intensive and the unskilled intensive sector.
Production in the skilled-intensive sector
Y st = F (Kt ,AtL
st ) ≡ AtL
st f (kt); kt ≡ Kt/AtL
st
Production in the unskilled-intensive sector
Y ut = AtaL
ut
Technological progress
At+1 = (1 + λ)At λ > 0.
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Inequality and Economic Development Robustness
Robustness: Technological Progress and Endogenous Education Cost
Labor Augmenting Technological Progress: increases the productivity of
workers in both the skilled-intensive and the unskilled intensive sector.
Production in the skilled-intensive sector
Y st = F (Kt ,AtL
st ) ≡ AtL
st f (kt); kt ≡ Kt/AtL
st
Production in the unskilled-intensive sector
Y ut = AtaL
ut
Technological progress
At+1 = (1 + λ)At λ > 0.
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Inequality and Economic Development Robustness
Robustness: Technological Progress and Endogenous Education Cost
Factor Prices
w st = At [f (k)− f ′(k)k] ≡ Atw
s
wut = Ata ≡ Atw
u
rt = r
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Inequality and Economic Development Robustness
Cost of Education
Weighted average of the payments to teachers, administrators, and
maintenance workers in the school system
⇒ Weighted average of the wages skilled and unskilled workers
CHt = θAtw
s + (1− θ)Atwu ≡ Ath
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Inequality and Economic Development Robustness
Cost of Education
Weighted average of the payments to teachers, administrators, and
maintenance workers in the school system
⇒ Weighted average of the wages skilled and unskilled workers
CHt = θAtw
s + (1− θ)Atwu ≡ Ath
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Inequality and Economic Development Robustness
Cost of Education
Weighted average of the payments to teachers, administrators, and
maintenance workers in the school system
⇒ Weighted average of the wages skilled and unskilled workers
CHt = θAtw
s + (1− θ)Atwu ≡ Ath
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Inequality and Economic Development Robustness
Income: Unskilled Individuals
xut+1 = (Atwu + bt)(1 + r) + At+1w
u
= Atwu(2 + r + λ) + (1 + r)bt
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Inequality and Economic Development Robustness
Income: Unskilled Individuals
xut+1 = (Atwu + bt)(1 + r) + At+1w
u
= Atwu(2 + r + λ) + (1 + r)bt
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Inequality and Economic Development Robustness
Income: Skilled Individuals
x st+1 =
At+1w
s − (Ath − bt)(1 + i) if bt ≤ Ath
At+1ws + (bt − Ath)(1 + r) if bt ≥ Ath
=⇒
x st+1 =
At [w
s(1 + λ)− (1 + i)h] + (1 + i)bt if bt ≤ Ath
At [ws(1 + λ)− (1 + r)h] + (1 + r)bt if bt ≥ Ath
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Inequality and Economic Development Robustness
Income: Skilled Individuals
x st+1 =
At+1w
s − (Ath − bt)(1 + i) if bt ≤ Ath
At+1ws + (bt − Ath)(1 + r) if bt ≥ Ath
=⇒
x st+1 =
At [w
s(1 + λ)− (1 + i)h] + (1 + i)bt if bt ≤ Ath
At [ws(1 + λ)− (1 + r)h] + (1 + r)bt if bt ≥ Ath
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Inequality and Economic Development Robustness
Threshold level of Bequest for Becoming Skilled Worker in Period t
f =At{wu(2 + r)− [w s − (1 + i)h]− λ(w s − wu)}
(i − r)
ftAt
=At{wu(2 + r)− [w s − (1 + i)h]− λ(w s − wu)}
(i − r)≡ f > 0
for
wu(2 + r) > [w s−(1 + i)h] + λ(w s−wu)
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Inequality and Economic Development Robustness
Threshold level of Bequest for Becoming Skilled Worker in Period t
f =At{wu(2 + r)− [w s − (1 + i)h]− λ(w s − wu)}
(i − r)
ftAt
=At{wu(2 + r)− [w s − (1 + i)h]− λ(w s − wu)}
(i − r)≡ f > 0
for
wu(2 + r) > [w s−(1 + i)h] + λ(w s−wu)
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Inequality and Economic Development Robustness
Threshold level of Bequest for Becoming Skilled Worker in Period t
f =At{wu(2 + r)− [w s − (1 + i)h]− λ(w s − wu)}
(i − r)
ftAt
=At{wu(2 + r)− [w s − (1 + i)h]− λ(w s − wu)}
(i − r)≡ f > 0
for
wu(2 + r) > [w s−(1 + i)h] + λ(w s−wu)
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Inequality and Economic Development Robustness
Bequest Dynamics
bt+1 =
(1− α){Atw
u(2 + r + λ) + (1 + r)bt} bt∈ [0, f ]
(1− α){At [ws(1 + λ)− (1 + i)h] + (1 + i)bt} bt∈ [f ,Ath]
(1− α){At [ws(1 + λ)− (1 + r)h] + (1 + r)bt} bt∈ [Ath,∞]
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Inequality and Economic Development Robustness
Bequest Dynamics
Let bt+1 ≡ bt+1At+1
bt+1 =
[1−α1+λ
]{wu(2 + r + λ) + (1 + r)bt} bt∈ [0, (f )]
[1−α1+λ
]{[w s(1 + λ)− (1 + i)h] + (1 + i)bt} bt∈ [f , h]
[1−α1+λ
]{[w s(1 + λ)− (1 + r)h] + (1 + r)bt} bt∈ [h,∞]
⇒ The dynamical system is unaffected qualitatively by labor-augmenting
technological progress
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Inequality and Economic Development Robustness
Bequest Dynamics
Let bt+1 ≡ bt+1At+1
bt+1 =
[1−α1+λ
]{wu(2 + r + λ) + (1 + r)bt} bt∈ [0, (f )]
[1−α1+λ
]{[w s(1 + λ)− (1 + i)h] + (1 + i)bt} bt∈ [f , h]
[1−α1+λ
]{[w s(1 + λ)− (1 + r)h] + (1 + r)bt} bt∈ [h,∞]
⇒ The dynamical system is unaffected qualitatively by labor-augmenting
technological progress
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Inequality and Economic Development Robustness
Sufficient Conditions for Multiple Steady-States
(1− α)(1 + r) < (1 + λ)
(1− α)(1 + i) > (1 + λ)
w s(1 + λ)− (1 + i)h < 0
⇒ The system is characterized by multiple steady-state, where theunstable equilibrium
g =(1− α)[(1 + i)h − w s(1 + λ)]
[(1− α)(i + i)− (1 + λ)]> 0
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