Inequality Overhang

March 28, 2017

Preview Citation

Format: Chicago

Francesco Grigoli, and Adrian Robles. Inequality Overhang, (USA: International Monetary Fund, 2017) accessed December 23, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

The linearity of the relationship between income inequality and economic development has been long questioned. While theory provides arguments for which the shape of relationship may be positive for low levels of inequality and negative for high ones, most of the empirical literature assumes a linear specification finding conflicting results. Employing an innovative empirical approach robust to endogeneity, we find pervasive evidence of nonlinearities. In particular, similar to the debt overhang literature, we identify an inequality overhang level in that the slope of the relationship between income inequality and economic development switches from positive to negative at a net Gini of about 27 percent. We also find that in an environment characterized by widespread financial inclusion and high income concentration, rising income inequality has a larger negative impact on economic development because banks may curtail credit to customers at the lower end of the income distribution. On the positive side, a sufficiently high female labor participation can act as a shock absorber reducing such negative impact, possibly through a more efficient allocation of resources.

Subject: Financial inclusion, Financial markets, Gender, Income inequality, Labor, National accounts, Personal income, Women

Keywords: Economic development, Financial inclusion, Gini, Gini value, Growth, Heterogeneity, Income concentration, Income distribution, Income inequality, Income levels, Income variable, Labor participation, Market Gini coefficient, Net Gini coefficient, Nonlinearities, Personal income, Western Hemisphere, Women, WP

Publication Details

Pages:

27
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/076
Stock No:

WPIEA2017076
ISBN:

9781475589634
ISSN:

1018-5941

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