Title: The long-run dynamics of income and inequality
Authors: Enrico Maria Cervellati - University of Bologna (Italy)
Gerrit Meyerheim - LMU Munich (Germany)
Peter Pedroni - Williams College (United States) [presenting]
Uwe Sunde - LMU Munich (Germany)
Abstract: The question of whether income inequality increases or decreases as a country develops, and what factors determine the shape of this relationship have been the matter of an intense debate over the past half century or more. We contribute to this debate in several ways. We propose a simple and coherent theoretical framework of long-run development that allow us to investigate the mechanisms behind the long-run dynamics of income and the distribution of income. The model generates dynamics of inequality in various dimensions over the long run and along the entire income distribution, both within and across countries as the result of technological change and its interplay with demographic development. The analytical framework reconciles seemingly incompatible and contradictory empirical results such as the Kuznets curve and the recent increase in inequality due to changes at the top tail within a single theoretical framework. By combining the analytical insights with a new econometric methodology for robustly estimating nonlinear relationships, we demonstrate a new approach to studying long run dynamics in the context of the model and investigate the role that institutions and demographics have played in shaping the income income-inequality nexus.