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Equality vs. Efficiency: Balancing Growth for a Sustainable Future

Explore the intricate relationship between equality and efficiency in economic growth. Delve into the complexities of the Seed Example, discussing incentive effects, labor supply, and savings behavior. Analyze the impact of redistribution on productivity and investigate the Winner-Take-All contests. Dive into the Kuznets Hypothesis, observing patterns of income distribution across different economies and understanding the factors influencing income inequality and GDP growth. Discover the mechanisms counteracting widening inequality and the stages of industrialization in the context of the Kuznets Hypothesis.

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Equality vs. Efficiency: Balancing Growth for a Sustainable Future

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  1. Equality, Efficiency and Growth Is There A Trade-Off?

  2. The Seed Example- Revisited • Seed from Heaven, Uncertainty • Two Goods -- Manna and Leisure • Manna=f(Seed, Labor, Luck) • 1 labor+2 seeds = 2 loaves + e • Seed Endowments Not Observable • Labor Endowments - 10 units each • Consumption of Manna Is Observable • (1,2,3,5,9)

  3. Why Trade-Off? • Incentive Effects • Labor supply • Savings Behavior • Higher propensity to save among rich • Factor Mobility • Progressive Tax can induce movement of capital and high income individuals to other countries or states.

  4. Second Fundamental Theorem of Welfare Economics • No trade-off if (a) markets are complete and perfectly competitive; and (b) it is possible to transfer wealth among consumers in an incentive neutral or lump sum matter. • Incentive neutral -- income transfers based on personal characteristics which are unaffected by behavior.

  5. Where Is Greater Equality More Efficient? • Principal-Agent Problems • Imperfect Information and Monitoring Costs • Profit Sharing Increases Productivity • Investments in Human Capital • Imperfect Capital Markets • Parent’s Resources Constrain Investments • Redistribution Can Improve Productivity • Winner Take-All Contests?

  6. Kuznets Hypothesis

  7. Observations • From 1929 to Post War, Income Share of Bottom Quintile of US Population Increased • Similar Patterns in UK and Germany • This is a puzzle that Kuznets analyzes in 1955 article in the American Economic Review.

  8. Reasons to Expect Positive Correlation Between Income Inequalit y and GDP • Concentration of savings in upper-income brackets should perpetuate and exacerbate existing inequality in the distribution of income. • Shift out of agriculture should widen income inequality because inequality tends to be greater in industy. Urbanization also should widen inequality.

  9. Factors That Tend to Counteract this Tendency • Legislative interference; Politics. • Demographic changes -- rich tend not to reproduce themselves. • Technological change • Slower productivity growth in incomes of rich. • Narrowing inequality in industry

  10. Kuznets Hypothesis • Early stages of industrialization and urbanization characterized by increasing inequality. • Late stages of industrialization characterized by decreasing inequality

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