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Inverted u-shaped relationship between inequality and economic performance

Author

Listed:
  • Yuichiro Matsumoto

    (Graduate School of Economics, Osaka University)

Abstract
This paper shows that in a borrowing-constrained economy, a median level of inequality stimulates investment, whereas low and high levels of inequality dampen investment. This nonlinearity is a result of two effects. There are more rich individuals in an equal economy than in an unequal economy. Therefore, more individuals can invest. However, in an equal economy, rich individuals have less wealth than they would in an unequal economy, which can dampen investment. My paper shows that these two effects produce nonlinearity if investment is indivisible.

Suggested Citation

  • Yuichiro Matsumoto, 2014. "Inverted u-shaped relationship between inequality and economic performance," Discussion Papers in Economics and Business 14-19, Osaka University, Graduate School of Economics.
    • Handle: RePEc:osk:wpaper:1419
    as

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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/1419.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Economic development; Indivisible investment; Misallocation of capital;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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