INCOME-DISTRIBUTION AND INVESTMENT

After being the subject of a heated debate during the sixties and the seventies, the relation between income distribution and growth has received renewed attention in recent years. The new literature has focused on three channels whereby this relation can occur: imperfections in capital markets, voting on fiscal policy, and political instability. In all these approaches, growth in or outside the steady-state is the result of investment in physical or human capital. Therefore, these theories can also be stated and tested in terms of the effects of income distribution on investment. This has the double advantage of reducing the complexity of a necessarily brief survey and of bringing out more clearly the main elements of novelty in this literature. So far, empirical implementations of these theories have in general been restricted to reduced form regressions of growth (or equivalently, investment) on income distribution and other variables. In this survey I take a step further and test the three approaches by explicitly estimating the role of the imperfections in capital markets, of government expenditure and of political instability in mediating the effects of income distribution on investment.