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Equality, Efficiency and Growth

Equality, Efficiency and Growth. Is There A Trade-Off?. The Seed Example- Revisited. Seed from Heaven, Uncertainty Two Goods -- Manna and Leisure Manna=f(Seed, Labor, Luck) 1 labor+2 seeds = 2 loaves + e Seed Endowments Not Observable Labor Endowments - 10 units each

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Equality, Efficiency and Growth

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  1. Equality, Efficiency and Growth Is There A Trade-Off?

  2. The Seed Example- Revisited • Seed from Heaven, Uncertainty • Two Goods -- Manna and Leisure • Manna=f(Seed, Labor, Luck) • 1 labor+2 seeds = 2 loaves + e • Seed Endowments Not Observable • Labor Endowments - 10 units each • Consumption of Manna Is Observable • (1,2,3,5,9)

  3. Why Trade-Off? • Incentive Effects • Labor supply • Savings Behavior • Higher propensity to save among rich • Factor Mobility • Progressive Tax can induce movement of capital and high income individuals to other countries or states.

  4. Second Fundamental Theorem of Welfare Economics • No trade-off if (a) markets are complete and perfectly competitive; and (b) it is possible to transfer wealth among consumers in an incentive neutral or lump sum matter. • Incentive neutral -- income transfers based on personal characteristics which are unaffected by behavior.

  5. Where Is Greater Equality More Efficient? • Principal-Agent Problems • Imperfect Information and Monitoring Costs • Profit Sharing Increases Productivity • Investments in Human Capital • Imperfect Capital Markets • Parent’s Resources Constrain Investments • Redistribution Can Improve Productivity • Winner Take-All Contests?

  6. Kuznets Hypothesis

  7. Observations • From 1929 to Post War, Income Share of Bottom Quintile of US Population Increased • Similar Patterns in UK and Germany • This is a puzzle that Kuznets analyzes in 1955 article in the American Economic Review.

  8. Reasons to Expect Positive Correlation Between Income Inequalit y and GDP • Concentration of savings in upper-income brackets should perpetuate and exacerbate existing inequality in the distribution of income. • Shift out of agriculture should widen income inequality because inequality tends to be greater in industy. Urbanization also should widen inequality.

  9. Factors That Tend to Counteract this Tendency • Legislative interference; Politics. • Demographic changes -- rich tend not to reproduce themselves. • Technological change • Slower productivity growth in incomes of rich. • Narrowing inequality in industry

  10. Kuznets Hypothesis • Early stages of industrialization and urbanization characterized by increasing inequality. • Late stages of industrialization characterized by decreasing inequality

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