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  • 10 - Economic Growth and Income Inequality: Insights from the Representative Consumer Theory of Distribution

  • from Part V - Special Topics on Economic Growth
  • Edited by John W. Diamond, Rice University, Houston, George R. Zodrow, Rice University, Houston
  • Book:
    Prospects for Economic Growth in the United States
    Published online:
    21 October 2021
    Print publication:
    04 November 2021, pp 263-318

  • Summary

    This chapter discusses the representative consumer theory of distribution (RCTD), highlighting the insights it offers into the growth–inequality relationship. It begins by embedding the RCTD in a basic Ramsey growth model, which presents its equilibrium structure in the most transparent manner. It then extends the analysis to include: (i) fiscal instruments; (ii) distribution of abilities across agents; (iii) a progressive tax structure; (iv) accumulation of human capital; and (v) public investment. The tradeoffs between inequality and other aggregates, both concurrent and over time, are stressed. RCTD introduces path dependence into the evolution of wealth and income inequality. Finally, while the tractability of RCTD makes it appealing and may provide many useful insights, it is based on strong assumptions adopted in much of contemporary macrodynamics. To understand the nature of the growth–inequality relationship, one needs to embed it within a consistently specified general equilibrium growth model, recognizing that different frameworks offer different perspectives and may lead to different conclusions.