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Public expenditure, income distribution, and growth in OECD countries.

Article Excerpt
Abstract

Economic growth and the several topics related to it have been studied by economists since their earliest publications. Two different approaches to this area can be found in Neoclassical and Endogenous growth models. The economic growth analysis has focused its attention on the factors that influence the growth of nations, such as fiscal policy or improvement of human capital. Nevertheless, it is also interesting to study the effects of income distribution on economic growth to determine if it has positive effects on growth. The aim of this paper is to study these effects. The authors will develop a theoretical model in which they will introduce public capital in a typical Cobb-Douglas production function. They will estimate OLS, GLS, and SUR fixed effects models for time series and cross-sectional data. (JEL 040)

Introduction

Economists have been deeply interested in the relationship between income inequality and growth. The publication of The General Theory by Keynes can be understood as the starting point of this relationship. This is because if one accepts the Keynesian hypothesis about savings, then it is necessary to get a redistribution of income to determine whether the richest economic agents get more income, thereby improving savings and eventually the growth of the economy [Kaldor, 1956].

By considering this assumption during the 1950s and 1960s, economists focused their attention on the effects of income distribution on growth, taking into account consumption and saving behavior. Up until the 1980s, theorists were less interested in the growth theory and their analysis accepted the representative agent behavior in overlapped generations models. In both cases, the income distribution is not included.

From the 1980s, and especially with the introduction of endogenous growth models [Romer, 1986, 1987; Rebelo, 1991], models took into account the effects of income distribution on growth. Two conclusions emerged [Aghion, Garcia-Penalosa, and Garoli, 1998a]. (1) Income inequality motivates economic incentives, improving economic growth. The reason is if we need savings to improve growth, it is necessary to shift income from poor to rich individuals. (2) The Kuznets [1955] curve which states that inequality will increase in the first development stages and will be lower later.

The main goal of this paper is to analyze the first statement. The next section will consider the effects of income distribution on growth. In section three, the authors will develop an economic growth model, including public sector behavior and income distribution using the CINI index. Section four provides econometric evidence....

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