Is Inequality Harmful for Growth?

by

Torsten Persson and Guido Tabellini

Abstract

Is inequality harmful for growth? We suggest that it is. In a society where distributional conflict is important, political decisions produce economic policies that tax investment and growth-promoting activities in order to redistribute income. The paper formulates a theoretical model that captures this idea. The model's implications are supported by the evidence. Both historical panel data and postwar cross sections indicate a significant and large negative relation between inequality and growth. This relation is only present in democracies.

JEL Classification numbers: E30, E62, H30, O40.