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Global Poverty Reduction and Pareto-Improving Redistribution

Chu, Angus C. (2009): Global Poverty Reduction and Pareto-Improving Redistribution.

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Abstract

Can a transfer of wealth from the US to the least developed countries be Pareto improving? We analyze this question in an open-economy R&D-based growth model, in which the high-income (low-income) country produces innovative (homogenous) goods. We find that wealth redistribution to the low-income country simultaneously reduces global inequality and increases growth through an increase in labor supply in the high-income country. Given that the market equilibrium of R&D-based growth models is usually inefficient due to R&D externalities, the wealth redistribution may lead to a Pareto improvement, which occurs if the discount rate is sufficiently low or R&D productivity is sufficiently high.

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