Why progressive redistribution can hurt the poor

R. Foellmi, M.C. Oechslin

Research output: Contribution to journalArticleScientificpeer-review

Abstract

Recent macroeconomic research discusses credit market imperfections as a key channel through which inequality retards growth: With convex technologies, progressive transfers increase aggregate output because marginal returns become more equalized across investment opportunities. We argue that this reasoning may not hold in general equilibrium. Since the investment functions are concave in wealth, reducing inequality increases capital demand and the interest rate. Hence, through the impact on capital costs, shifting wealth from the rich to the middle class depletes the poorest investors' access to credit. But because the poor face the highest marginal returns, the net effect on output may be negative. We find, however, that redistributing towards the bottom-end of the distribution has a clear positive impact. Finally, we discuss the implications of our theoretical findings for future empirical research.
Original languageEnglish
Pages (from-to)738-747
JournalJournal of Public Economics
Volume92
Issue number3-4
DOIs
Publication statusPublished - Apr 2008
Externally publishedYes

Fingerprint

Wealth
Redistribution
Investment opportunities
General equilibrium
Middle class
Macroeconomics
Investors
Empirical research
Cost shifting
Aggregate output
Credit market imperfections
Access to credit
Interest rates
Capital cost

Keywords

  • capital market imperfections
  • inequality
  • growth
  • efficiency

Cite this

Foellmi, R. ; Oechslin, M.C. / Why progressive redistribution can hurt the poor. In: Journal of Public Economics. 2008 ; Vol. 92, No. 3-4. pp. 738-747.
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Why progressive redistribution can hurt the poor. / Foellmi, R.; Oechslin, M.C.

In: Journal of Public Economics, Vol. 92, No. 3-4, 04.2008, p. 738-747.

Research output: Contribution to journalArticleScientificpeer-review

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