A 1996 study by Perotti examined the channels through which inequality may affect economic growth.
He showed that, in accordance with the credit market imperfection approach, inequality is associated
with lower level of human capital formation (education, experience, and apprenticeship) and higher
level of fertility, and thereby lower levels of growth. He found that inequality is associated with higher
levels of redistributive taxation, which is associated with lower levels of growth from reductions in
private savings and investment. Perotti concluded that, "more equal societies have lower fertility rates
and higher rates of investment in education. Both are reflected in higher rates of growth. Also, very
unequal societies tend to be politically and socially unstable, which is reflected in lower rates of
investment and therefore growth."[79]
Robert Barro reexamined the reduced form relationship between inequality on economic growth in a
panel of countries.[80] He argues that there is "little overall relation between income inequality and
rates of growth and investment." However, his empirical strategy limits its applicability to the
understanding of the relationship between inequality and growth for several reasons. First, his
regression analysis control for education, fertility, investment, and it therefore excludes, by
construction, the important effect of inequality on growth via education, fertility, and investment. His
findings simply imply that inequality has no direct effect on growth beyond the important indirect
effects through the main channels proposed in the literature. Second his study analyzes the effect of
inequality on the average growth rate in the following 10 years. However, existing theories suggest that
the effect of inequality will be observed much later, as is the case in human capital formation, for
instance. Third, the empirical analysis does not account for biases that are generated by reverse
causality and omitted variables.
A study of Swedish counties between 1960 and 2000 found a positive impact of inequality on growth
with lead tim