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The optimal rate of inequality: A framework for the relationship between income inequality and economic growth

Charles-Coll, Jorge A. (2010): The optimal rate of inequality: A framework for the relationship between income inequality and economic growth.

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Abstract

This paper contributes to the debate over the relationship between inequality and growth by proposing that the disparities in empirical studies derive from the fact that they have not accounted for the level of inequality as a factor that can affect the sign of the relationship. An inverted “U” shaped relationship is demonstrated, showing that low levels of inequality exert a positive correlation with economic growth while high levels have a negative one. Additionally, and more importantly, it is demonstrated the existence of an optimal rate of inequality (ORI) that maximizes growth rates and releases the economy from any distortion generated by elevated inequality or taxation. Empirical evidence from a broad panel of countries as well as a bibliometric analysis is presented to validate these propositions.

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