The Dynamic Link Between Inequality and Economic Growth: A Stochastic Approach
Date
2015
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Producer
Director
Performer
Choreographer
Costume Designer
Music
Videographer
Lighting Designer
Set Designer
Crew Member
Funder
Rehearsal Director
Concert Coordinator
Advisor
Moderator
Panelist
Alternative Title
Department
Haverford College. Department of Economics
Type
Thesis
Original Format
Running Time
File Format
Place of Publication
Date Span
Copyright Date
Award
Language
eng
Note
Table of Contents
Terms of Use
Rights Holder
Access Restrictions
Haverford users only
Terms of Use
Tripod URL
Identifier
Abstract
In this thesis I present a theoretical, neoclassical growth model with a rigorous microeconomic foundation that examines the bidirectional dynamic link between inequality and economic growth. I take a standard Real Business Cycle model and augment the production function to incorporate human capital in accordance with the Mankiw, Romer, and Weil (1992) extension to the standard Solow Growth Model. My thesis contributes to the scope and detail of the existing literature, adding a spectrum of heterogeneous households differentiated in size, asset holdings, and stock of human capital. I utilize a Markov Transition Matrix to capture the stochastic and persistent nature of the business cycle and extend investment in human capital at the microeconomic level. I introduce two frictions to propagate inequality shocks from the microeconomic to the macroeconomic level: imperfect capital markets and discrete human capital. Results indicate that the relationship between inequality and growth is complex, but that stable growth occasionally decreases the income Gini Coefficient. The introduced frictions and nature of the model combine to generate patterns of investment shocks and capital depreciation that prevent the economy from reaching the steady-state achieved by the social planner or competitive markets, indicating that reducing the severity of frictions leads to economic stability and a Pareto Efficient improvement for the economy in the long-run.