From Physical to Human Capital Accumulation:
Inequality in the Process of Development
Oded Galor and Omer Moav
Galor-Moav
Inequality and Growth
1 / 55
Objectives
Objectives
Galor-Moav
Inequality and Growth
2 / 55
Objectives
Objectives
A uni…ed theory of inequality and economic development:
Galor-Moav
Inequality and Growth
2 / 55
Objectives
Objectives
A uni…ed theory of inequality and economic development:
Captures the changing role of inequality in the growth process
Galor-Moav
Inequality and Growth
2 / 55
Objectives
Objectives
A uni…ed theory of inequality and economic development:
Captures the changing role of inequality in the growth process
Uni…es the Classical and the Modern Paradigms
Galor-Moav
Inequality and Growth
2 / 55
Objectives
Objectives
A uni…ed theory of inequality and economic development:
Captures the changing role of inequality in the growth process
Uni…es the Classical and the Modern Paradigms
Provides an intertemporal reconciliation between con‡icting viewpoints
about the e¤ect of inequality on economic growth
Galor-Moav
Inequality and Growth
2 / 55
Objectives
Objectives
A uni…ed theory of inequality and economic development:
Captures the changing role of inequality in the growth process
Uni…es the Classical and the Modern Paradigms
Provides an intertemporal reconciliation between con‡icting viewpoints
about the e¤ect of inequality on economic growth
Generates novel testable predictions that may resolve empirical disputes
about the relationship between inequality and growth
Galor-Moav
Inequality and Growth
2 / 55
Objectives
The Classical Approach
The Classical Approach
Galor-Moav
Inequality and Growth
3 / 55
Objectives
The Classical Approach
The Classical Approach
Inequality is bene…cial for growth
Galor-Moav
Inequality and Growth
3 / 55
Objectives
The Classical Approach
The Classical Approach
Inequality is bene…cial for growth
The marginal propensity to save increases with income
Galor-Moav
Inequality and Growth
3 / 55
Objectives
The Classical Approach
The Classical Approach
Inequality is bene…cial for growth
The marginal propensity to save increases with income
Inequality channels resources towards individuals whose marginal propensity
to save is higher
Galor-Moav
Inequality and Growth
3 / 55
Objectives
The Classical Approach
The Classical Approach
Inequality is bene…cial for growth
The marginal propensity to save increases with income
Inequality channels resources towards individuals whose marginal propensity
to save is higher
=) increases aggregate savings & capital accumulation
Galor-Moav
Inequality and Growth
3 / 55
Objectives
The Classical Approach
The Classical Approach
Inequality is bene…cial for growth
The marginal propensity to save increases with income
Inequality channels resources towards individuals whose marginal propensity
to save is higher
=) increases aggregate savings & capital accumulation
=) enhances the development process
Galor-Moav
Inequality and Growth
3 / 55
Objectives
The Modern Approach
The Credit Market Imperfections Approach:
Galor-Moav
Inequality and Growth
4 / 55
Objectives
The Modern Approach
The Credit Market Imperfections Approach:
Inequality is harmful for growth
Galor-Moav
Inequality and Growth
4 / 55
Objectives
The Modern Approach
The Credit Market Imperfections Approach:
Inequality is harmful for growth
CMI increases the cost of investment in human capital for less endowed
individuals
Inequality increases the fraction of society for which investment in human
capital is suboptimal
=) reduces human capital accumulation
Galor-Moav
Inequality and Growth
4 / 55
Objectives
The Modern Approach
The Credit Market Imperfections Approach:
Inequality is harmful for growth
CMI increases the cost of investment in human capital for less endowed
individuals
Inequality increases the fraction of society for which investment in human
capital is suboptimal
=) reduces human capital accumulation
=) slows down the development process
Galor-Moav
Inequality and Growth
4 / 55
A Uni…ed Theory
A Uni…ed Theory of Inequality and Development
Galor-Moav
Inequality and Growth
5 / 55
A Uni…ed Theory
A Uni…ed Theory of Inequality and Development
A uni…ed theory of the dynamic implications of inequality on the growth
process
Galor-Moav
Inequality and Growth
5 / 55
A Uni…ed Theory
A Uni…ed Theory of Inequality and Development
A uni…ed theory of the dynamic implications of inequality on the growth
process
Places the dominating modern theories within a broader uni…ed structure
Galor-Moav
Inequality and Growth
5 / 55
A Uni…ed Theory
A Uni…ed Theory of Inequality and Development
A uni…ed theory of the dynamic implications of inequality on the growth
process
Places the dominating modern theories within a broader uni…ed structure
Provides an intertemporal reconciliation between the Classical viewpoint and the Modern perspective
Galor-Moav
Inequality and Growth
5 / 55
A Uni…ed Theory
Main Hypothesis
Main Hypothesis
Galor-Moav
Inequality and Growth
6 / 55
A Uni…ed Theory
Main Hypothesis
Main Hypothesis
The replacement of physical capital accumulation by human capital accumulation as a prime engine of economic growth has changed the qualitative impact
of inequality on the process of development
Galor-Moav
Inequality and Growth
6 / 55
A Uni…ed Theory
Main Hypothesis
Main Hypothesis
The replacement of physical capital accumulation by human capital accumulation as a prime engine of economic growth has changed the qualitative impact
of inequality on the process of development
Early stages of industrialization: physical capital accumulation is a main
engine of growth =)
Galor-Moav
Inequality and Growth
6 / 55
A Uni…ed Theory
Main Hypothesis
Main Hypothesis
The replacement of physical capital accumulation by human capital accumulation as a prime engine of economic growth has changed the qualitative impact
of inequality on the process of development
Early stages of industrialization: physical capital accumulation is a main
engine of growth =)
Inequality enhanced development by channeling resources towards individuals whose marginal propensity to save is higher
Galor-Moav
Inequality and Growth
6 / 55
A Uni…ed Theory
Main Hypothesis
Main Hypothesis
The replacement of physical capital accumulation by human capital accumulation as a prime engine of economic growth has changed the qualitative impact
of inequality on the process of development
Early stages of industrialization: physical capital accumulation is a main
engine of growth =)
Inequality enhanced development by channeling resources towards individuals whose marginal propensity to save is higher
Later stages of development: the return to human capital increases due to
capital-skill complementarity and human capital became the prime engine of
growth =)
Galor-Moav
Inequality and Growth
6 / 55
A Uni…ed Theory
Main Hypothesis
Main Hypothesis
The replacement of physical capital accumulation by human capital accumulation as a prime engine of economic growth has changed the qualitative impact
of inequality on the process of development
Early stages of industrialization: physical capital accumulation is a main
engine of growth =)
Inequality enhanced development by channeling resources towards individuals whose marginal propensity to save is higher
Later stages of development: the return to human capital increases due to
capital-skill complementarity and human capital became the prime engine of
growth =)
Inequality, due to credit constraints, is harmful for growth
Galor-Moav
Inequality and Growth
6 / 55
A Uni…ed Theory
Central Argument
Central Argument
Galor-Moav
Inequality and Growth
7 / 55
A Uni…ed Theory
Central Argument
Central Argument
Fundamental asymmetry between:
Galor-Moav
Inequality and Growth
7 / 55
A Uni…ed Theory
Central Argument
Central Argument
Fundamental asymmetry between:
Human capital accumulation
Galor-Moav
Inequality and Growth
7 / 55
A Uni…ed Theory
Central Argument
Central Argument
Fundamental asymmetry between:
Human capital accumulation
Physical capital accumulation
Galor-Moav
Inequality and Growth
7 / 55
A Uni…ed Theory
Central Argument
Human Capital vs. Physical Capital Accumulation
Galor-Moav
Inequality and Growth
8 / 55
A Uni…ed Theory
Central Argument
Human Capital vs. Physical Capital Accumulation
Human capital is embodied in humans =)
Galor-Moav
Inequality and Growth
8 / 55
A Uni…ed Theory
Central Argument
Human Capital vs. Physical Capital Accumulation
Human capital is embodied in humans =)
Physiological constraints subjects its accumulation at the individual level
to diminishing returns
Galor-Moav
Inequality and Growth
8 / 55
A Uni…ed Theory
Central Argument
Human Capital vs. Physical Capital Accumulation
Human capital is embodied in humans =)
Physiological constraints subjects its accumulation at the individual level
to diminishing returns
The accumulation of human capital would be larger if it would be widely
distributed among individuals in society
Galor-Moav
Inequality and Growth
8 / 55
A Uni…ed Theory
Central Argument
Human Capital vs. Physical Capital Accumulation
Human capital is embodied in humans =)
Physiological constraints subjects its accumulation at the individual level
to diminishing returns
The accumulation of human capital would be larger if it would be widely
distributed among individuals in society
Physical capital accumulation may bene…t from the concentration of wealth
among individuals whose marginal propensity to save is larger
Galor-Moav
Inequality and Growth
8 / 55
A Uni…ed Theory
Central Argument
Inequality and Physical and Human Capital Accumulation
Galor-Moav
Inequality and Growth
9 / 55
A Uni…ed Theory
Central Argument
Inequality and Physical and Human Capital Accumulation
Inequality is conducive for physical capital accumulation, as long as
the marginal propensity to save rises with income
Galor-Moav
Inequality and Growth
9 / 55
A Uni…ed Theory
Central Argument
Inequality and Physical and Human Capital Accumulation
Inequality is conducive for physical capital accumulation, as long as
the marginal propensity to save rises with income
Inequality is harmful for human capital accumulation, as long as
credit constraints are binding
Galor-Moav
Inequality and Growth
9 / 55
A Uni…ed Theory
Central Argument
Inequality and Growth in Di¤erent Stages of Development
Galor-Moav
Inequality and Growth
10 / 55
A Uni…ed Theory
Central Argument
Inequality and Growth in Di¤erent Stages of Development
Inequality stimulates economic growth in stages of development in
which physical capital accumulation is the prime engine of growth
Galor-Moav
Inequality and Growth
10 / 55
A Uni…ed Theory
Central Argument
Inequality and Growth in Di¤erent Stages of Development
Inequality stimulates economic growth in stages of development in
which physical capital accumulation is the prime engine of growth
Inequality is harmful for economic growth in stages of development in
which human capital accumulation is the prime engine of economic
growth and credit constraints are still binding
Galor-Moav
Inequality and Growth
10 / 55
A Uni…ed Theory
Mechanism
Early Stages of Industrialization
Galor-Moav
Inequality and Growth
11 / 55
A Uni…ed Theory
Mechanism
Early Stages of Industrialization
Labor (and thus human capital) is abundant and physical capital is scarce
Galor-Moav
Inequality and Growth
11 / 55
A Uni…ed Theory
Mechanism
Early Stages of Industrialization
Labor (and thus human capital) is abundant and physical capital is scarce
The return to physical capital is higher than the return to human capital
Galor-Moav
Inequality and Growth
11 / 55
A Uni…ed Theory
Mechanism
Early Stages of Industrialization
Labor (and thus human capital) is abundant and physical capital is scarce
The return to physical capital is higher than the return to human capital
Physical capital accumulation is the main engine of growth
Galor-Moav
Inequality and Growth
11 / 55
A Uni…ed Theory
Mechanism
Early Stages of Industrialization
Labor (and thus human capital) is abundant and physical capital is scarce
The return to physical capital is higher than the return to human capital
Physical capital accumulation is the main engine of growth
=) Inequality is conducive for growth
Galor-Moav
Inequality and Growth
11 / 55
A Uni…ed Theory
Mechanism
Later Stages of Development
Galor-Moav
Inequality and Growth
12 / 55
A Uni…ed Theory
Mechanism
Later Stages of Development
Physical capital accumulation complements human capital
Galor-Moav
Inequality and Growth
12 / 55
A Uni…ed Theory
Mechanism
Later Stages of Development
Physical capital accumulation complements human capital
The return to human capital increases su¢ ciently so as to induce human
capital accumulation (Nelson and Phelps (1966), Shultz (1975), Foster and Rosenzweig (1996))
Galor-Moav
Inequality and Growth
12 / 55
A Uni…ed Theory
Mechanism
Later Stages of Development
Physical capital accumulation complements human capital
The return to human capital increases su¢ ciently so as to induce human
capital accumulation (Nelson and Phelps (1966), Shultz (1975), Foster and Rosenzweig (1996))
Investment in human capital is sub-optimal due to CMI ) the return to
human capital is higher than on physical capital
Galor-Moav
Inequality and Growth
12 / 55
A Uni…ed Theory
Mechanism
Later Stages of Development
Physical capital accumulation complements human capital
The return to human capital increases su¢ ciently so as to induce human
capital accumulation (Nelson and Phelps (1966), Shultz (1975), Foster and Rosenzweig (1996))
Investment in human capital is sub-optimal due to CMI ) the return to
human capital is higher than on physical capital
Human capital accumulation is the main engine of growth
Galor-Moav
Inequality and Growth
12 / 55
A Uni…ed Theory
Mechanism
Later Stages of Development
Physical capital accumulation complements human capital
The return to human capital increases su¢ ciently so as to induce human
capital accumulation (Nelson and Phelps (1966), Shultz (1975), Foster and Rosenzweig (1996))
Investment in human capital is sub-optimal due to CMI ) the return to
human capital is higher than on physical capital
Human capital accumulation is the main engine of growth
=) Inequality is harmful for growth
Galor-Moav
Inequality and Growth
12 / 55
A Uni…ed Theory
Reconciliation between Various Approaches
Reconciliation: The Classical and Modern Approaches
Galor-Moav
Inequality and Growth
13 / 55
A Uni…ed Theory
Reconciliation between Various Approaches
Reconciliation: The Classical and Modern Approaches
A positive e¤ect of inequality on growth underlined by the Classical Approach
re‡ects early stages of industrialization when physical capital accumulation
was the prime engine of growth
Galor-Moav
Inequality and Growth
13 / 55
A Uni…ed Theory
Reconciliation between Various Approaches
Reconciliation: The Classical and Modern Approaches
A positive e¤ect of inequality on growth underlined by the Classical Approach
re‡ects early stages of industrialization when physical capital accumulation
was the prime engine of growth
A negative e¤ect of inequality on growth underlined by the Modern Approach re‡ects later stages of development when human capital accumulation
becomes a prime engine of growth, and credit constraints are still binding
Galor-Moav
Inequality and Growth
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The Model
Production
The Basic Structure of the Model
Overlapping-Generations economy
Galor-Moav
Inequality and Growth
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The Model
Production
The Basic Structure of the Model
Overlapping-Generations economy
t = 0, 1, 2, 3, ...
Galor-Moav
Inequality and Growth
14 / 55
The Model
Production
The Basic Structure of the Model
Overlapping-Generations economy
t = 0, 1, 2, 3, ...
One good
Galor-Moav
Inequality and Growth
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The Model
Production
The Basic Structure of the Model
Overlapping-Generations economy
t = 0, 1, 2, 3, ...
One good
Two factors:
Physical capital (PC)
Human Capital (HC)
Galor-Moav
Inequality and Growth
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The Model
Production
The Basic Structure of the Model
Output per-capita grows over time due to the accumulation of factors
of production.
Galor-Moav
Inequality and Growth
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The Model
Production
The Basic Structure of the Model
Output per-capita grows over time due to the accumulation of factors
of production.
The stock of physical capital: Output produced in the preceding period
net of consumption and HC investment
Galor-Moav
Inequality and Growth
15 / 55
The Model
Production
The Basic Structure of the Model
Output per-capita grows over time due to the accumulation of factors
of production.
The stock of physical capital: Output produced in the preceding period
net of consumption and HC investment
The level of HC: Outcome of education decisions, subject to borrowing
constraint
Galor-Moav
Inequality and Growth
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The Model
Production
Production of Final Output
The output produced at time t :
Yt = F (Kt , Ht )
Galor-Moav
Ht f (kt )
Inequality and Growth
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The Model
Production
Production of Final Output
The output produced at time t :
Yt = F (Kt , Ht )
Ht f (kt )
Kt - PC
Galor-Moav
Inequality and Growth
16 / 55
The Model
Production
Production of Final Output
The output produced at time t :
Yt = F (Kt , Ht )
Ht f (kt )
Kt - PC
Ht - HC (e¢ ciency units)
Galor-Moav
Inequality and Growth
16 / 55
The Model
Production
Production of Final Output
The output produced at time t :
Yt = F (Kt , Ht )
Ht f (kt )
Kt - PC
Ht - HC (e¢ ciency units)
kt
Galor-Moav
Kt /Ht
Inequality and Growth
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The Model
Production
Factor Prices
Demand for factors of production at time t
Galor-Moav
rt
= f 0 (kt )
r (kt )
wt
= f (kt )
f 0 (kt )kt
Inequality and Growth
w (kt )
17 / 55
The Model
Individuals
Individuals
Galor-Moav
Inequality and Growth
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The Model
Individuals
Individuals
Continuum of measure 1
Galor-Moav
Inequality and Growth
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The Model
Individuals
Individuals
Continuum of measure 1
Individuals have 1 parent and 1 child
Galor-Moav
Inequality and Growth
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The Model
Individuals
Individuals
Continuum of measure 1
Individuals have 1 parent and 1 child
Identical in:
Preferences
Innate abilities
Galor-Moav
Inequality and Growth
18 / 55
The Model
Individuals
Individuals
Continuum of measure 1
Individuals have 1 parent and 1 child
Identical in:
Preferences
Innate abilities
Di¤er in:
Parental income ) Inv’t in HC
Galor-Moav
Inequality and Growth
18 / 55
The Model
Individuals
Individuals of Generation t
Galor-Moav
Inequality and Growth
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The Model
Individuals
Individuals of Generation t
First period of life (Period t ):
Human capital formation
Galor-Moav
Inequality and Growth
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The Model
Individuals
Individuals of Generation t
First period of life (Period t ):
Human capital formation
Second period of life (Period t + 1):
Supply their e¢ ciency units of labor
Galor-Moav
Inequality and Growth
19 / 55
The Model
Individuals
Individuals of Generation t
First period of life (Period t ):
Human capital formation
Second period of life (Period t + 1):
Supply their e¢ ciency units of labor
Allocate income & inheritance to:
(a) Consumption (b) Transfers to children
Galor-Moav
Inequality and Growth
19 / 55
The Model
Individuals
Individuals of Generation t
First period of life (Period t ):
Human capital formation
Second period of life (Period t + 1):
Supply their e¢ ciency units of labor
Allocate income & inheritance to:
(a) Consumption (b) Transfers to children
Transfers are allocated to:
Finance of o¤spring’s education
Galor-Moav
Inequality and Growth
19 / 55
The Model
Individuals
Individuals of Generation t
First period of life (Period t ):
Human capital formation
Second period of life (Period t + 1):
Supply their e¢ ciency units of labor
Allocate income & inheritance to:
(a) Consumption (b) Transfers to children
Transfers are allocated to:
Finance of o¤spring’s education
Saving for o¤spring’s future wealth
Galor-Moav
Inequality and Growth
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The Model
Individuals
Individual i of Generation t: Wealth
Second period wealth:
Iti +1 = wt +1 hti +1 + xti +1
Galor-Moav
Inequality and Growth
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The Model
Individuals
Individual i of Generation t: Wealth
Second period wealth:
Iti +1 = wt +1 hti +1 + xti +1
wt +1 – wage
Galor-Moav
Inequality and Growth
20 / 55
The Model
Individuals
Individual i of Generation t: Wealth
Second period wealth:
Iti +1 = wt +1 hti +1 + xti +1
wt +1 – wage
hti +1 – e¢ ciency units of labor
Galor-Moav
Inequality and Growth
20 / 55
The Model
Individuals
Individual i of Generation t: Wealth
Second period wealth:
Iti +1 = wt +1 hti +1 + xti +1
wt +1 – wage
hti +1 – e¢ ciency units of labor
xti +1 – inheritance
Galor-Moav
Inequality and Growth
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The Model
Individuals
Individual i of Generation t: Budget Constraint
Second Period budget constraint:
cti +1 + bti +1
Galor-Moav
Iti +1
Inequality and Growth
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The Model
Individuals
Individual i of Generation t: Budget Constraint
Second Period budget constraint:
cti +1 + bti +1
cti +1
Galor-Moav
Iti +1
consumption
Inequality and Growth
21 / 55
The Model
Individuals
Individual i of Generation t: Budget Constraint
Second Period budget constraint:
cti +1 + bti +1
Iti +1
cti +1
consumption
bti +1
transfers to the o¤spring
Galor-Moav
Inequality and Growth
21 / 55
The Model
Individuals
Individual i of Generation t: Intergenerational Transfers
Transfer to o¤spring, bti +1 , is allocated between:
Galor-Moav
Inequality and Growth
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The Model
Individuals
Individual i of Generation t: Intergenerational Transfers
Transfer to o¤spring, bti +1 , is allocated between:
Finance of o¤spring’s education - eti +1
Galor-Moav
Inequality and Growth
22 / 55
The Model
Individuals
Individual i of Generation t: Intergenerational Transfers
Transfer to o¤spring, bti +1 , is allocated between:
Finance of o¤spring’s education - eti +1
Saving for o¤spring’s future wealth
sti +1 = bti +1
Galor-Moav
Inequality and Growth
eti +1
22 / 55
The Model
Individuals
Individual i of Generation t: Intergenerational Transfers
Transfer to o¤spring, bti +1 , is allocated between:
Finance of o¤spring’s education - eti +1
Saving for o¤spring’s future wealth
sti +1 = bti +1
eti +1
Inheritance
xti +1 = sti Rt +1 = (bti
Galor-Moav
Inequality and Growth
eti )Rt +1
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The Model
Individuals
Individual i of Generation t: Human capital formation
E¢ ciency units of labor in period t + 1
hti +1 = h (eti )
Galor-Moav
Inequality and Growth
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The Model
Individuals
Individual i of Generation t: Human capital formation
E¢ ciency units of labor in period t + 1
hti +1 = h (eti )
eti
Galor-Moav
expenditure on education
Inequality and Growth
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The Model
Individuals
Individual i of Generation t: Human capital formation
ht+1
h(et)
1
et
Galor-Moav
Inequality and Growth
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The Model
Individuals
Optimal Inv’t in Education of Member i of Generation t
In the absence of borrowing constraints:
eti = arg max[wt +1 h (eti ) + (bti
Galor-Moav
Inequality and Growth
eti )Rt +1 ]
25 / 55
The Model
Individuals
Optimal Inv’t in Education of Member i of Generation t
In the absence of borrowing constraints:
eti = arg max[wt +1 h (eti ) + (bti
eti )Rt +1 ]
et is unique and identical across members of generation t
Galor-Moav
Inequality and Growth
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The Model
Individuals
Optimal Inv’t in Education of Member i of Generation t
et = 0
if
Rt +1 > wt +1 h0 (0)
wt+1h(et)
Rt+1
wt+1
et
et= 0
Galor-Moav
Inequality and Growth
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The Model
Individuals
Optimal Inv’t in Education of Member i of Generation t
et > 0
if
wt +1 h0 (et ) = Rt +1
wt+1h(et)
Rt+1
wt+1
et
Galor-Moav
Inequality and Growth
et
27 / 55
The Model
Individuals
Optimal Inv’t in Education of Member i of Generation t
~
R(k)
~
w(k)h(et)
~
w(k)
et
et= 0
Galor-Moav
Inequality and Growth
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The Model
Individuals
Optimal Inv’t in Education of Member i of Generation t
et = e (kt +1 )
Galor-Moav
8
< = 0 if
:
> 0 if
Inequality and Growth
kt + 1
ke
kt +1 > ke
29 / 55
The Model
Individuals
Optimal Inv’t in Education of Member i of Generation t
et = e (kt +1 )
where
8
< = 0 if
:
e 0 (kt +1 ) > 0
Galor-Moav
kt + 1
kt +1 > ke
> 0 if
if
ke
kt +1 > ke
Inequality and Growth
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The Model
Individuals
Borrowing Constraint of Member i of Generation t
Individuals cannot borrow to …nance the education expenditure of their
o¤spring:
Galor-Moav
Inequality and Growth
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The Model
Individuals
Borrowing Constraint of Member i of Generation t
Individuals cannot borrow to …nance the education expenditure of their
o¤spring:
eti = min[e (kt +1 ), bti ]
Galor-Moav
Inequality and Growth
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The Model
Individuals
Preferences and Transfers of Member i of Generation t
Preferences:
uti = (1
Galor-Moav
β) log cti +1 + β log(θ + bti +1 )
Inequality and Growth
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The Model
Individuals
Preferences and Transfers of Member i of Generation t
Preferences:
uti = (1
β) log cti +1 + β log(θ + bti +1 )
Optimal transfer to o¤spring:
8
< β(Iti +1
i
i
bt +1 = b (It +1 )
: 0
where θ
θ (1
Galor-Moav
θ ) if
Iti +1
θ
if
Iti +1
θ
β)/β
Inequality and Growth
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The Model
Individuals
Optimal transfer of a member i of generation t
bit+1
bit+1(Iit+1)
β
θ
Galor-Moav
Inequality and Growth
Iit+1
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The Model
Individuals
Saving of Member i of Generation t
sti =
Galor-Moav
8
< bti
:
bti
eti
ke
if
kt + 1
if
kt +1 > ke
Inequality and Growth
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The Model
Individuals
Saving of Member i of Generation t
sti =
8
< bti
:
bti
eti
ke
if
kt + 1
if
kt +1 > ke
Saving rate sti +1 / Iti +1 is increasing in Iti +1
Galor-Moav
Inequality and Growth
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The Model
Dynamics
Initial Wealth Distribution
The economy consists of two groups in period 0:
Galor-Moav
Inequality and Growth
34 / 55
The Model
Dynamics
Initial Wealth Distribution
The economy consists of two groups in period 0:
Capitalists (R)
Fraction λ of all adult individuals
Galor-Moav
Inequality and Growth
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The Model
Dynamics
Initial Wealth Distribution
The economy consists of two groups in period 0:
Capitalists (R)
Fraction λ of all adult individuals
Equally own the initial capital stock
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The Model
Dynamics
Initial Wealth Distribution
The economy consists of two groups in period 0:
Capitalists (R)
Fraction λ of all adult individuals
Equally own the initial capital stock
Workers (P)
Fraction 1
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λ of all adult individuals
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The Model
Dynamics
Initial Wealth Distribution
The economy consists of two groups in period 0:
Capitalists (R)
Fraction λ of all adult individuals
Equally own the initial capital stock
Workers (P)
Fraction 1 λ of all adult individuals
No ownership over the initial capital stock
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The Model
Dynamics
Factor Accumulation
Kt +1 =
Z 1
0
sti di = λ(btR
etR ) + (1
λ)(btP
etP )
= K (btR , btp , kt +1 )
Ht +1 =
Z 1
0
hti +1 di = λh (etR ) + (1
λ)h (etP )
= H (btR , btP , kt +1 )
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The Model
Dynamics
The Capital-Labor Ratio
kt +1 =
Kt +1
K (btR , btP , kt +1 )
=
Ht + 1
H (btR , btP , kt +1 )
=)
kt +1 = κ (btR , btP )
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The Model
Dynamics
The Evolution of Transfers within group i = R,P
bti +1 = maxf β[wt +1 h (eti ) + (bti
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Inequality and Growth
eti )Rt +1
θ ], 0g
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The Model
Dynamics
The Evolution of Transfers within group i = R,P
bti +1 = maxf β[wt +1 h (eti ) + (bti
eti )Rt +1
θ ], 0g
=)
bti +1 = φ(bti , kt +1 )
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The Model
Dynamics
The Evolution of Transfers within group i = R,P
bti +1 = maxf β[wt +1 h (eti ) + (bti
eti )Rt +1
θ ], 0g
=)
bti +1 = φ(bti , kt +1 )
b, a critical level of k below which individuals who do not receive
There exists k
parental transfers (i.e., bti = eti = 0) do not transfer income to their o¤spring:
w (kb) = θ
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The Model
Dynamics
The Evolution of Transfers within group i = R,P
bti +1 = maxf β[wt +1 h (eti ) + (bti
eti )Rt +1
θ ], 0g
=)
bti +1 = φ(bti , kt +1 )
b, a critical level of k below which individuals who do not receive
There exists k
parental transfers (i.e., bti = eti = 0) do not transfer income to their o¤spring:
w (kb) = θ
Galor-Moav
bti +1
= φ(0, kt +1 )
8
< = 0 if
:
> 0 if
Inequality and Growth
kt + 1
kb
kt +1 > kb
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The Model
Dynamics
The Evolution of Transfers within Group i =R,P
bti +1 = φ(bti , kt +1 ) = φ(bti , κ (btR , btP ))
ψi (btR , btP )
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The Model
Dynamics
The dynamical system
fbtP , btR gt∞=0 such that:
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The Model
Dynamics
The dynamical system
fbtP , btR gt∞=0 such that:
btP+1 = ψP (btR , btP )
btR+1 = ψR (btR , btP )
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Inequality and Development
The Process of Development
The Process of Development
Regime I: PC Accumulation (k
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ke)
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Inequality and Development
The Process of Development
The Process of Development
Regime I: PC Accumulation (k
ke)
Regime II: HC Accumulation (k > ke)
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Inequality and Growth
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Inequality and Development
The Process of Development
The Process of Development
Regime I: PC Accumulation (k
ke)
Regime II: HC Accumulation (k > ke)
Stage I of Regime II (K̃ < K
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K̂ )
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Inequality and Development
The Process of Development
The Process of Development
Regime I: PC Accumulation (k
ke)
Regime II: HC Accumulation (k > ke)
Stage I of Regime II (K̃ < K
K̂ )
Stage II of Regime II (K̂ < K < K )
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Inequality and Development
The Process of Development
The Process of Development
ke)
Regime I: PC Accumulation (k
Regime II: HC Accumulation (k > ke)
Stage I of Regime II (K̃ < K
K̂ )
Stage II of Regime II (K̂ < K < K )
Stage III of Regime II (K > K )
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Inequality and Development
The Process of Development
Regime I: Physical Capital Accumulation
Early stages of development (k
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ke)
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Inequality and Development
The Process of Development
Regime I: Physical Capital Accumulation
Early stages of development (k
ke)
K is the main engine of growth: ρHC < ρK
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Inequality and Development
The Process of Development
Regime I: Physical Capital Accumulation
Early stages of development (k
ke)
K is the main engine of growth: ρHC < ρK
No investment in education
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Inequality and Development
The Process of Development
Regime I: Physical Capital Accumulation
Early stages of development (k
ke)
K is the main engine of growth: ρHC < ρK
No investment in education
No Transfers within Group P
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Inequality and Development
The Process of Development
Regime I: Physical Capital Accumulation
Early stages of development (k
ke)
K is the main engine of growth: ρHC < ρK
No investment in education
No Transfers within Group P
Transfers within Group R "
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Inequality and Development
The Process of Development
Regime I: Physical Capital Accumulation
Early stages of development (k
ke)
K is the main engine of growth: ρHC < ρK
No investment in education
No Transfers within Group P
Transfers within Group R "
Wages "
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Inequality and Development
The Process of Development
Regime I: Physical Capital Accumulation
Early stages of development (k
ke)
K is the main engine of growth: ρHC < ρK
No investment in education
No Transfers within Group P
Transfers within Group R "
Wages "
Income inequality "
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Inequality and Development
The Process of Development
The Conditional Dynamical System: Regime I
bit+1
φ(bit ;k)
450
Group P
Group R
Poverty Trap
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b(k)
Inequality and Growth
bit
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Inequality and Development
The Process of Development
Regime I: E¤ect of Inequality
Inequality enhances the process development
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Inequality and Development
The Process of Development
Regime I: E¤ect of Inequality
Inequality enhances the process development
A transfer of wealth from Group R to P =)
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Inequality and Development
The Process of Development
Regime I: E¤ect of Inequality
Inequality enhances the process development
A transfer of wealth from Group R to P =)
Aggregate consumption "
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Inequality and Development
The Process of Development
Regime I: E¤ect of Inequality
Inequality enhances the process development
A transfer of wealth from Group R to P =)
Aggregate consumption "
Aggregate intergenerational transfers #
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Inequality and Development
The Process of Development
Regime I: E¤ect of Inequality
Inequality enhances the process development
A transfer of wealth from Group R to P =)
Aggregate consumption "
Aggregate intergenerational transfers #
Rate of capital accumulation #
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Inequality and Development
The Process of Development
Regime II: Human Capital Accumulation
Mature stages of development: (k > ke)
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Inequality and Development
The Process of Development
Regime II: Human Capital Accumulation
Mature stages of development: (k > ke)
HC is the engine of growth: ρHC
Galor-Moav
ρK
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Inequality and Development
The Process of Development
Stage I of Regime II: HC Accumulation by group R
Stage I of Regime II (K̃ < K
Galor-Moav
K̂ )
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Inequality and Development
The Process of Development
Stage I of Regime II: HC Accumulation by group R
Stage I of Regime II (K̃ < K
K̂ )
Members of group P
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Inequality and Development
The Process of Development
Stage I of Regime II: HC Accumulation by group R
Stage I of Regime II (K̃ < K
K̂ )
Members of group P
No intergenerational transfers
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Inequality and Development
The Process of Development
Stage I of Regime II: HC Accumulation by group R
Stage I of Regime II (K̃ < K
K̂ )
Members of group P
No intergenerational transfers
No investment in education
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Inequality and Development
The Process of Development
Stage I of Regime II: HC Accumulation by group R
Stage I of Regime II (K̃ < K
K̂ )
Members of group P
No intergenerational transfers
No investment in education
Members of group R
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Inequality and Development
The Process of Development
Stage I of Regime II: HC Accumulation by group R
Stage I of Regime II (K̃ < K
K̂ )
Members of group P
No intergenerational transfers
No investment in education
Members of group R
Transfers "
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Inequality and Development
The Process of Development
Stage I of Regime II: HC Accumulation by group R
Stage I of Regime II (K̃ < K
K̂ )
Members of group P
No intergenerational transfers
No investment in education
Members of group R
Transfers "
Expenditure on education "
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Inequality and Growth
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Inequality and Development
The Process of Development
Stage I of Regime II: HC Accumulation by group R
Stage I of Regime II (K̃ < K
K̂ )
Members of group P
No intergenerational transfers
No investment in education
Members of group R
Transfers "
Expenditure on education "
Wages "
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Inequality and Growth
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Inequality and Development
The Process of Development
Stage I of Regime II: HC Accumulation by group R
Stage I of Regime II (K̃ < K
K̂ )
Members of group P
No intergenerational transfers
No investment in education
Members of group R
Transfers "
Expenditure on education "
Wages "
Income inequality "
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Inequality and Development
The Process of Development
The Conditional Dynamical System: Stage I of Regime II
bit+1
φ(bit ;k)
450
Group P
Group R
Poverty b(k)
Trap
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bit
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Inequality and Development
The Process of Development
Stage II of Regime II : HC Accumulation by the Poor
Stage II of Regime II (K̂ < K < K )
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Inequality and Development
The Process of Development
Stage II of Regime II : HC Accumulation by the Poor
Stage II of Regime II (K̂ < K < K )
Members of group P (credit constrained): ρHC > ρK
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Inequality and Development
The Process of Development
Stage II of Regime II : HC Accumulation by the Poor
Stage II of Regime II (K̂ < K < K )
Members of group P (credit constrained): ρHC > ρK
Start to transfers
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Inequality and Development
The Process of Development
Stage II of Regime II : HC Accumulation by the Poor
Stage II of Regime II (K̂ < K < K )
Members of group P (credit constrained): ρHC > ρK
Start to transfers
Start to acquire education
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Inequality and Development
The Process of Development
Stage II of Regime II : HC Accumulation by the Poor
Stage II of Regime II (K̂ < K < K )
Members of group P (credit constrained): ρHC > ρK
Start to transfers
Start to acquire education
Members of group R (not credit constrained): ρHC = ρK
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Inequality and Development
The Process of Development
Stage II of Regime II : HC Accumulation by the Poor
Stage II of Regime II (K̂ < K < K )
Members of group P (credit constrained): ρHC > ρK
Start to transfers
Start to acquire education
Members of group R (not credit constrained): ρHC = ρK
Invest optimally in human and physical capital
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Inequality and Development
The Process of Development
Conditional Dynamical System: Stage II-III of Regime II
bit+1
450
φ(bit ;k)
bit
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Inequality and Development
The Process of Development
Stage II of Regime II: E¤ect of Inequality
More equality is bene…cial for the process development
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Inequality and Development
The Process of Development
Stage II of Regime II: E¤ect of Inequality
More equality is bene…cial for the process development
A transfer of wealth from group R to group P allows (due to credit
constraint) a more e¢ cient allocation of aggregate investment between
HC and PC
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Inequality and Development
The Process of Development
Stage III of Regime II : Credit Constraints are not Binding
All individuals are not credit constrained: R HC = R K
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Inequality and Development
The Process of Development
Stage III of Regime II : Credit Constraints are not Binding
All individuals are not credit constrained: R HC = R K
Inequality has no e¤ect on the process of development
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Inequality and Development
The Process of Development
The changing Role of Inequality in the Development Process
0_____________k̃_______________
Regime I
Regime II
ρK > ρH
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ρK
ρH
K only engine
HC main engine
Inequality (+)
Inequality (-)
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Inequality and Development
The Process of Development
E¤ect of Inequality in Regime II
k̃ _____________k̂ __________k ____________
Stage I
Stage II
Stage III
ρK < ρH
p
ρK = ρH
R
ρK < ρH
P
ρK = ρH
R
ρK = ρH
2 engines
HC main engine
2 engines
Inequality (-)
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Inequality and Development
Testable implications
Testable Implications
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Inequality and Development
Testable implications
Testable Implications
The CMI approach
The e¤ect on inequality depends on the country’s level of income. Inequality
is bene…cial for poor economies and harmful for rich ones
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Inequality and Development
Testable implications
Testable Implications
The CMI approach
The e¤ect on inequality depends on the country’s level of income. Inequality
is bene…cial for poor economies and harmful for rich ones
The Uni…ed Approach
The e¤ect of inequality on growth depends on the relative return to human
and physical capital. The higher is the relative return to human capital the
more harmful is inequality for economic growth
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Inequality and Development
Implications for DC and LDCs
Implications for DC and LDCS
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Inequality and Development
Implications for DC and LDCs
Implications for DC and LDCS
The replacement of physical capital accumulation by human capital accumulation as a prime engine of economic growth has changed the impact of
inequality on the process of development
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Inequality and Development
Implications for DC and LDCs
Implications for DC and LDCS
The replacement of physical capital accumulation by human capital accumulation as a prime engine of economic growth has changed the impact of
inequality on the process of development
Inequality stimulates economic growth in stages of development in which
physical capital accumulation is the prime engine of growth
Galor-Moav
Inequality and Growth
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Inequality and Development
Implications for DC and LDCs
Implications for DC and LDCS
The replacement of physical capital accumulation by human capital accumulation as a prime engine of economic growth has changed the impact of
inequality on the process of development
Inequality stimulates economic growth in stages of development in which
physical capital accumulation is the prime engine of growth
Inequality is harmful for economic growth in stages of development in
which human capital accumulation is the prime engine of economic
growth
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Inequality and Growth
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Inequality and Development
Implications for DC and LDCs
Implications for DC and LDCS
The replacement of physical capital accumulation by human capital accumulation as a prime engine of economic growth has changed the impact of
inequality on the process of development
Inequality stimulates economic growth in stages of development in which
physical capital accumulation is the prime engine of growth
Inequality is harmful for economic growth in stages of development in
which human capital accumulation is the prime engine of economic
growth
Int’l capital in‡ow to LDCs and the adoption of skilled-biased technologies may
place economies directly in the second stage in which inequality is harmful
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Inequality and Development
References
References
Galor-Moav
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Inequality and Development
References
References
Main Source:
Galor, Oded and Omer Moav, 2004, "From Physical to Human Capital Accumulation: Inequality and the Process of Development," Review of Economic
Studies, 71(4), 1001-1026.
Related Papers:
Galor, Oded and Omer Moav, 2006, "Das Human-Kapital: A Theory of the
Demise of the Class Structure," Review of Economic Studies, 73(1), 85-117.
Galor, Oded and Joseph Zeira, 1993, "Income Distribution and Macroeconomics," Review of Economic Studies, 60(1), 35-52.
Galor, Oded and Omer Moav, and Dietrich Vollrath, 2009, "Inequality in
Landownership, Human Capital Promoting Institutions and the Great Divergence" Review of Economic Studies, 76(1), 143-179.
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