Income Inequality, Government Expenditure, and

Economic Growth: Theory and Empirics

Xiaofeng Liu 1， Hua Cao 2

1
Department of Finance, College of Economics, Nankai University.
2
Department of Finance, College of Economics, Nankai University.
June 2008

ABSTRACT

To explain the relationship between income inequality and economic growth, we develop a

computational model of endogenous growth by taking the effects of fixed government

expenditure into account. With such a model, a non-linear relationship between level of income

inequality and economic growth rate is identified and shown to be consistent with empirical

findings reported in the literature. This relationship can be either positive or negative, depending

on per capita GDP. In fact, there exists a threshold level for per capita GDP. If the per capita

GDP is above this threshold, income inequality facilitates economic growth; otherwise, it hurts

economic growth. The threshold point is jointly determined by income inequality level and per

capita GDP. Furthermore, our model indicates that there exists a positive relation between

income inequality level and per capita GDP on these threshold points. Using cross-country data,

we empirically verify this relationship from the computational model. Sensitivity analysis is

performed to show the robustness of our results.

Keywords： Income inequality, economic growth, government expenditure, majority

voting, basic tax rate.

JEL: E40 ; O42; D60.

1
 1. Introduction

It is well known that income inequality rises and falls during the course of economic

development and income distribution affects growth rate of per capita income (Kuznets,

1955). The relationship between income inequality and economic growth has received much
attention and has been controversial over the past 5 decades. Unfortunately, there is still no

consensus in the literature about whether income inequality is beneficial or harmful to

economic growth. Theoretically, some researchers showed that income inequality may slow

down economic growth. (see Alesina and Rodrik 1994; Persson and Tabellini 1994;

Benabou 1996, and Zhang 2005), while others argued that income inequality may encourage

economic growth (see Kaldor 1957; Li and Zou 1998). Empirically, while earlier studies

illustrated negative relationships (see Alesina and Rodrik 1994; Persson and Tabellini 1994),

several recent studies reported positive relationships (see Li and Zou 1998; Forbes 2000). In

Barro (2000), with a panel of countries for a period from 1960 to 1995, it has been shown

that economic growth rate is negatively associated with income inequality for countries with

per capita GDP below $2,070 (in 1985 dollars), but positively associated with income

inequality for countries with per capita GDP above that income level. Barro (2000)

speculated that credit-market imperfection might be a cause for the result. Works on

interpreting the lower growth caused by higher inequality due to imperfect credit-market

were reported by Galor and Zeira (1993) and Fishman and Simhon (2002). There were also
some studies on explaining the negative relationship between inequality and growth by

using other factors such as unstable social and political environment caused by inequality

(see Benhabib and Rustichini 1996). Other related research papers in this area include De La
Croix and Doepke (2004), Deininger (1997, 1998), Garcia-Penalosa and Turnovsky (2006),

Panizza (2002), and Partridge (1997). Although many studies have been done in this area,

there is no satisfactory theoretical model that can explain the empirical findings in Barro

(2000) where the relationship between income inequality and economic growth changes

from a negative to a positive one as per capita income increases. The main contributions of

our study are (1) to develop a theoretical model to interpret this non-linear relationship, and
(2) to conduct an empirical analysis to test the theoretical predictions from this model and to

show the robustness of the results.

2
 The aim of this paper is to examine the relationship between income inequality and

economic growth by developing a computational model of endogenous growth. Taking the

effects of fixed government expenditure into account, we can theoretically explain the

relationship illustrated by Barro (2000). In contrast to previous studies, we focus on the

government expenditure structure as a critical and central role in establishing the

relationship between income inequality level and economic growth rate. More importantly,

in a calibrated version of our model, we also find that a higher income inequality leads to a
higher threshold income level for changing the type of this relationship. Using empirical

data based on a panel of countries, we have conducted a sensitivity analysis which shows

the robustness of empirical results which support the predicted relationship from our

computational model.

In this paper, we assume that government expenditure brings positive utility to

households or agents. With distributional conflicts among agents, tax rate is determined by
majority voting. Distinguished from the related studies in the literature, we also assume that

there is a minimum level of fixed government expenditure. Generally, fixed government

expenditure includes items that a government must provide according to laws or

conventions, such as compulsory education, basic medical care, welfare transfers, and law

enforcement, etc. Corresponding to the minimum fixed government expenditure, there

should be a minimum or so-called basic tax rate.

Considering this fixed government expenditure, a rise in income inequality imposes

two opposite effects on economic growth via tax rate. First of all, with higher income

inequality, a decrease in income of low income group will push to increase government

expenditure, leading to a higher tax rate. The effect of a higher tax rate is to slows down the

economic growth (to be shown later in this paper). On the other hand, with higher income

inequality, the decrease in the median-voter’s income will lead to a lower demand for some

non-essential public goods (e.g. better roads, more funding for improving air-quality etc.)

that he or she prefers. This effect often leads to a lower desired tax rate, which in turn,

improves the economic growth. The overall impact of income inequality depends on which

effect dominates. In a poor country (with low per capita GDP), the first effect is more

significant than the second one; Thus, a higher income inequality will slow down economic

3
growth. However, in a rich country, the second effect is dominant so that a higher income

inequality will encourage its economic growth. Quantitatively, the “poor” and “rich”

countries are distinguished by a threshold income level for per capita GDP.

The result from our model is consistent with Barro (2000)’s empirical evidence which

showsa threshold income level of $2070 (in the 1985 US dollar). In addition, our model

indicates that the threshold income level is not constant and is positively associated with

income inequality, given other economic parameters are held fixed. The empirical tests
support this theoretical prediction.

The remainder of this paper is organized as follows: In section 2, a quantitative model

is formulated to explain the relationship between income inequality and economic growth

via fixed government expenditure; Section 3 presents a model-based analysis by using a

calibrated model with parameters within reasonable value ranges. Section 4 presents an

empirical analysis to test the results from the theoretical model. Section 5 concludes with a
summary.

2. Model Development

2.1 Economy

The economy is closed, and populated by a continuum of infinitely-lived households in

interval [0,1]. All households have a uniform utility function but different capital stocks

(both physical and human capital). At time t , for two households λi , λ j ∈ [0,1], if

λi < λ j ，then the capital stocks k t (λ i ) and k t (λ j ) satisfy 0< k t (λ i ) < k t (λ j ) . Let k t
denote the mean capital stock of all households at time t . For household λi , we define

k t ( λi )
Ft ( λi ) ≡ , 0 ≤ λi ≤ 1. (1)
kt

Here Ft (λi ) represents the wealth distribution of an economy at time t . Thus, at

time t , the Lorenz curve of the economy is given by

4
 Z
∫ k t (λ )dλ Z
∫ Ft (λ )dλ
0
Lt ( Z ) = = , 0 ≤ Z ≤ 1. (2)
kt × N 0

1
where N is the measure of the population. Obviously, N = ∫ dλ
0
i =1. From (2), we

have Lt (0) = 0 ，Lt (1) = 1 and Ft ( λi ) = Lt ' ( λi ) . For household λi , income or output at

time t is defined as

y it = Ak it . (3)
where kit = kt (λi ) for notational simplicity and A is the technology parameter. The
production function (3) is called an AK-type, following King and Rebelo [1990].
1
From (3) and ∫ 0
F t ( λ ) d λ = 1 , at time t , the aggregate output of the economy Yt

is
1 1
Yt = ∫ 0
Ak it (λ i )dλ i = ∫ 0
AF t ( λ i ) k t d λ i = Ak t . (4)

2.2 Government Expenditure and Basic Tax Rate

It is assumed that government expenditure consists of a ‘fixed’ and a ‘variable’ parts. A
government must ensure that the fixed part is spent. In fact, if the government cuts down
some items in its fixed expenditure, it will have to increase other items so that the fixed
government expenditure is still above a minimum level. For example, reducing budget on
free compulsory education and welfare transfer may negatively affect education opportunity
and quality of life for the poor, and hence, increase the crime rate. Therefore, the
government will have to increase the expenditure on law enforcement, another item in the
fixed government expenditure. For this reason, the tax rate also has a minimum level, called
‘basic’ tax rate to support the fixed government expenditure. Given a basic tax rate,
households will vote on whether and how much an actual tax rate should be raised from the
basic tax rate. The results of majority voting determine this actual tax rate.
We assume that the fixed government expenditure is influenced mainly by the income
of the poor (low income households). This is because major items in fixed government
expenditure are compulsory education, basic medical care, social welfare, and law
enforcement. As pointed out earlier, a minimum budget on these items is needed to ensure

5
the basic needs of the poor. For the fixed government expenditure, the amount allocated to
each household is different.

Assumption 1: The amount of the fixed government allocated to household λi at time t ,

denoted by xit ( yit , ε ) , is determined by

⎧ C + f ( y it ) , f ' < 0, f (0) > 0, f ( yεt ) = 0 if 0 ≤ λi ≤ ε

xit = ⎨ t . (5)
⎩ Ct if ε < λi ≤ 1

where Ct > 0 , is the part that is not influenced by the income and proportion of the poor

and f ( yit ) is the part that is influenced by the income and proportion of the poor.

We use notation xit ( yit , ε ) to reflect that xit is influenced by yit and ε, where yit

is the income level of household λi at time t , and ε (0< ε <1) is the proportion of poor

households in a population. Note that f ( y it ) is a decreasing function. For example, if

f ( y it ) includes a welfare transfer to the poor, then the welfare amount will decrease with

the income of the poor. In general, f ( y it ) consists of these items which are negatively

associated with the income level of the poor. On the other hand, for Ci , the part not
affected by the income level of the poor, national defense expenditure is an example.

At time t , the total fixed government expenditure, denoted by M t is

1 ε
M t =
∫x
0
it d λ it = C t +
∫ f (y
0
it ) d λ it (6)

For mathematical tractability, we use a linear function,

f ( y it ) = S t − ηy it ， St > 0 ， η > 0. (7)

where S t represents the upper limit of income dependent expenditure and η the

marginal change in expenditure for a unit change in household income. Substituting (7) into
(6) yields

M t = C t + S t ε − ηYt Lt (ε ) , St > 0 ， η > 0. (8)

Note that other function forms for f ( y it ) , such as non-linear decreasing function, will not
affect the general results but significantly increase the complexity of the analysis. Therefore,

we choose this simple linear function for our model development. From (8), at time t , the

‘basic’ tax rate τ ft can be determined as

6
 Mt
τ ft = . (9)
Yt

In an endogenous growth framework, we can show that all households have the same

income growth rate on a balanced growth path (see Subsection 2.3) and the income and

wealth distribution will be invariant over time. Thus, we have

Lt ( Z ) = L0 ( Z ) ≡ L( Z ) ， 0 ≤ Z ≤ 1, (10)

and Yt = Y0 e γt , (11)

where γ is the average growth rate of per capita income. It is also assumed that Ct and
St are given by
C t = C 0 e γt ， and S t = S 0 e γt . (12)

Otherwise, the ratio of fixed expenditure to aggregate output of the economy will become
unrealistically either one or zero over time. Here C0 and S0 are the values at time 0.

From (8)-(12), the basic tax rate τ f (subscript t is dropped for the time invariant tax rate)

can be expressed by

C 0 + S 0ε
τf = − ηL(ε ) , 0< ε <1. (13)
Ak 0

It follows from (13) that basic tax rate τ f depends on both the initial aggregate income of

the economy Y0 = Ak 0 and the income distribution (or the Lorenze curve L(ε ) ). If Y0 is

a constant, then a higher income inequality implies a lower L(ε ) , and thus, a higher basic
tax rate τ f . Hence, the fixed government expenditure will increase accordingly.

Furthermore, each household will vote on whether, and by how much, the actual tax

rate should be raised from the basic tax rate. This actual tax rate is determined by majority
voting.

2.3 Household Behavior and Average Growth Rate

To see how majority voting works, we analyze household behavior by considering their

desirable tax rates. For household λi , the present value of its lifetime utility u i can be

expressed as
+∞ ⎡ c it1 − θ − 1 ⎤
ui = ∫
0
⎢
⎣ 1−θ
+ ln( g − x it ) + v ( x it ) ⎥e − ρ t dt ,
⎦
ρ > 0. (14)

7
In (14), cit is household λi ’s consumption at time t , θ is the coefficient of relative risk
aversion, and ρ is the discount rate. Generally, θ > 0 , but in this paper we assume θ > 1 ,

which is also used by King and Rebelo (1990). Empirically, Hall (1988) reported that θ
usually takes a value in [1, 10]. v( xit ) is the utility derived from xit , determined by (5).
Finally, g is the total government expenditure, and ln( g − x it ) is the utility derived
from the total government spending after the transfer component xit , where the logarithmic
utility function is used. From (14), we can obtain the average income growth rate as follows:

Proposition 1: The average growth rate of income per capita in the economy is given by

cit kit yit (1 − τ ) A − ρ

γ = γi = = = = . (15)
cit kit yit θ

Proof: See Appendix A.

As all households have the same growth rate γ , we have

k it = k i 0 e γt , (16)

ρ − (1 − τ )(1 − θ ) A
cit = k i 0 e γt . (17)
θ
Therefore, the income distribution is invariant over time and is the same as at time 0. We

can drop the subscript t for the distribution function and have

Ft (λi ) = F0 (λi ) ≡ F (λi ) , 0 ≤ λi ≤ 1. (18)

It follows from the transversality condition (A1.3) in the proof of Proposition 1 (Appendix

A) that

(1 − θ )(1 − τ ) A < ρ . (19)

Condition (19) indicates that (17) is always positive.

2.4 Political Equilibrium

Based on the household’s utility maximization behavior, we show that there exists a

unique preferred tax rate from majority voting. In an economy, all public choices are made

by majority voting. For household λi , the desirable tax rate τ should maximize the
present value of its lifetime utility. Intuitively, λi ’s utility will initially increase and then

decrease as tax rate τ increases from 0 to 1. This means that there exists an optimal (or

8
preferred) tax rate in [0,1] that maximizes λi ’s utility function. Meanwhile, the government
tries to balance its budget at each point in time. Thus, the instantaneous government budget

constraint is

g = τY t = τAk 0 e γt . (20)
In practice, g >> x it , and g ≈ g − x it . Thus, we utilize an approximation

g − x it ≈ τAk 0 e γt . (21)

Substituting (21), (17), (15) into (14), we obtain

−θ
( k ) 1−θ ⎡ ρ − (1 − τ )(1 − θ ) A ⎤ ln(τ ) (1 − τ ) A − ρ
ui = i0 + + +X , (22)
1 − θ ⎢⎣ θ ⎥⎦ ρ ρ 2θ

1 ln( A) ln(k 0 ) +∞
where X ≡ − + + + ∫ v ( x it )e − ρt dt .
ρ (1 − θ ) ρ ρ 0

Based on (22), we can establish the following result.

Proposition 2: If the present value of a household’s life time utility is determined by (22),

then there exists a unique preferred or desirable tax rate for majority voting. This rate τ m

also called the median voter’s preferred tax rate is determined by the equation:
−θ −1
1−θ ⎡ ρ − (1 − τ m )(1 − θ ) A ⎤ 1 A
− A ⎡⎣ F (λm )k0 ⎤⎦ ⎢ ⎥ + − =0. (23)
⎣ θ ⎦ τmρ ρ 2θ

and the median-voter λm =1/2

Proof: See Appendix A.

Let τ v be the tax rate that a government actually implements. Obviously, we have

⎧τ m if τm >τ f
τv = ⎨ . (24)
⎩τ f if τm ≤τ f

It follows form (24) and (15) that the balanced growth rate
⎧ (1 − τ m ) A − ρ
⎪⎪ if τm >τ f
γ =⎨ θ . (25)
(1 − τ f ) A − ρ
⎪ if τm ≤τ f
⎪⎩ θ

2.5 An Important Result

From (23), we can further establish an important result as follows:

9
Proposition 3. If Lorenze curve L(ε ) is invariant over time, then there exists a threshold

(1 − τ f ) A − ρ
value k ' >0 such that if k 0 < k ' , then τ m < τ f and γ = ; if k 0 > k ' , then
θ
(1 − τ m ) A − ρ
τ m ≥ τ f and γ = .
θ
Proof: See Appendix A.

Based on Proposition 3, if the initial income level is low enough so that k 0 < k ' , then

γ = [(1 − τ f ) A − ρ ] / θ . In this case, a higher income inequality leads to a lower wealth of

poor households or a smaller L(ε ) , where ε is the proportion of poor households in the

population. Therefore, from (13), the tax rate τ f will become higher, and the growth rate

γ will be lower. This concludes that a high inequality hurts economic growth for poor
countries. On the other hand, if the initial income level is high enough so that k 0 > k ' , then

γ = [(1 − τ m ) A − ρ ] / θ . Then, a higher income inequality leads to a decrease in the median

voter’s capital holding F (λm ) . Based on the fact dτ m / d [ F (λm )] > 0 ) which is shown in
Appendix A, τ m will become lower, and so the growth rate γ will be higher. This means

that a high inequality improves economic growth for rich countries. Based on our model,

k ' can be computed numerically.

Obviously, the results predicted by Proposition 3 are consistent with Barro (2000)’s

empirical findings. In addition, an interesting and important property can be shown

numerically from Propositions 2 and 3 that threshold level k ' depends on income
distribution. In Section 3, we further discuss this property.

3. Model-based Analysis

This section presents quantitative results by calibrating the model developed. First, we
discuss different measures of income inequality as the consistency of these measures is

critical to empirical tests of our model.

3.1 Measures of Income Inequality

10
 In the model development, we used two indices of measuring income inequality. One is
L(ε ) , the wealth of poor households, where ε is the proportion of poor households in a
population. In our analysis, there is a negative relationship between L(ε ) and income

inequality level. The other index is F (λm ) , the median voter’s capital holding, and the
relationship between F (λm ) and income inequality level is also negative. In addition, a third

index, called the Gini coefficient, has been used in many previous empirical analyses. It is

reasonable to compare our model-based results with the Gini coefficient-based empirical
results only if the sorted orders with these three indices are consistent for a set of income

distributions. Unfortunately, we can show that these orders are not always consistent. This

order-inconsistency problem with different indices has not been addressed in the literature
(e.g., Alesina and Rodrik 1994; Li and Zou 1998).

We first examine the sorted orders by using Gini coefficient and F (λm ) . Intuitively,

Gini coefficient and F (λm ) are consistent in measuring income inequality, but this
consistency does not always hold. For example, consider three Lorenze curves as follows

(see Figure 1):

L1 = Z 3 / 2 , L2 = 1 − Sin[(1 − Z )π / 2] , L3 = Z 3 ( 0 ≤ Z ≤ 1 ),
their Gini coefficients are 0.2, 4 / π − 1 ≈ 0.2732, 0.5, respectively. Obviously, the sorted

order of three income distributions with the Gini coefficients is L1 ≺ L2 ≺ L3 . However,

from λ m = 1 / 2 , it is easy to find that three F (λm ) ’s are 3 2 / 4 , π 2 / 4 , 3 / 4 ,

respectively. Thus, the sorted order with F (λm ) becomes L3 ≺ L1 ≺ L2 . With this

counterexample, we conclude that Gini coefficient and F (λm ) are not always consistent in

ranking income inequality. Therefore, in theory, empirical analyses based on Gini

coefficients may not be always reliable for validating the theoretical model based on

F (λm ) . Although there is no 100% consistency of using different indices in measuring

income inequality, it may still be reasonable to use the Gini coefficient-based empirical
results to test our F (λm ) -based theoretical model approximately if the probability of

consistency is high enough for a realistic value range of Gini coefficients. Fortunately, our

simulation study shows that the probability of consistency between the Gini coefficient and
F (λm ) is at least 92% for the relevant range of the Gini coefficients (see Table 1). Hence,

11
we can use the Gini coefficient-based empirical results to test our F (λm ) -based model
approximately.

Similarly, there also exist some examples showing the inconsistency in measuring the

income inequality with the Gini coefficient and L(ε ) . Intuitively, it is inconceivable that as
the income inequality increases, the wealth share of poor households L(ε ) will also

increase. In fact, it is easy to prove that, if the Lorenze curves do not intersect each other,

the sorted orders with the Gini coefficient and L(ε ) are consistent. However, in theory,
we cannot eliminate the possibility of having Lorenze curves to intersect. We also

conducted a simulation study and found the probability of consistency is not as high as

between F (λm ) and Gini coefficient. But this probability is still fairly high - about
80%-90% consistency. Our conjecture is that the probability of in consistency among these

indices is small enough to be ignored in practice. This conjecture is tested to be reasonable

by using the cross-country data in 4.2.

3.2 Numerical Illustration with Calibrated Model

In a calibrated model, we choose A =0.5, θ =7.0, ρ =0.025, ε =30%, C0 =0,
S0 =1 (in $1000’s), and η =1.75. Note that this set of parameters fall in the value
ranges of empirical data.
The income of households is assumed to follow a Pareto distribution with CDF
as
⎧ ⎛ x ⎞ −φ
⎪ 1− when x ≥ x0
F ( x) = ⎨ ⎜⎝ x0 ⎟⎠ φ > 1, (26)
⎪
⎩0 when x < x0

and the corresponding Lorenze curve as

L( Z ) = 1 − (1 − Z ) δ , (27)

where δ = [(φ − 1) / φ ] . For φ > 1 , we have 0 < δ < 1 . Note that the relation
between Gini coefficient and δ is
1
Gini = 1 − 2∫ [1 − (1 − Z )δ ]dZ ,
0

which can be used to determine the corresponding δ from a given Gini

12
coefficient. For the Gini coefficient value in [0.34,0.5] and the related δ , using (13),
(23), (24) and (25), we obtain the economic growth rate as a function of the Gini
coefficient and per capita GDP, which is computationally shown in Figure 2. In this
3-D graph, there exists a “ridge” on the surface which indicates a threshold line for
the per capita income and Gini coefficient. To display it more clearly, we produce a
gradient graph in Figure 3 in which along the direction of the arrows, the economic
growth rate increases ( ↑ ). The solid line in Figure 3 corresponds to the ‘ridge’ on
the surface of Figure 2. For a given Gini coefficient, we can find a threshold income
level for per capita GDP. When the per capita GDP is higher than this threshold, a
region of positive relation between Gini coefficient and economic growth rate is
reached. Depending on how far the actual per capita GDP is above the threshold,
there is a feasible “positive relation” range from the lowest Gini coefficient (0.34 in
Figure 3) to an upper limit which is above the given Gini coefficient (the point on
the bold line). Over this Gini coefficient range, the higher the income inequality, the
higher the economic growth rate. On the other hand, for the same given Gini
coefficient, when the per capita GDP is below the threshold, a region of negative
relation between Gini coefficient and economic growth rate is reached. Depending
on how far the actual per capita GDP is below the threshold, there is a feasible
“negative relation” region from the highest Gini coefficient (0.50 in Figure 3) to a
lower limit below the given Gini coefficient (the point on the bold line). Over this
range, the higher the income inequality, the lower the economic growth rate. In other
words, every point on the bold line (or the ‘ridge’) is a turning point. More
interestingly, the positive slope of the bold line in Figure 3 implies that the turning
point, or the threshold income level will increase with the income inequality. Barro
(2000) found that $2070 ( in 1985 dollars) is the threshold income level using a
particular set of cross-country data. Our results show that this turning point depends
on the shape of income distribution or Gini coefficient. (Note: in this paper, “income
distribution” means “relative income distribution”, which ignores the central
location change).

13
 4. Empirical Analysis
4.1 Data
In this section, we present the empirical evidence showing the effect of income

inequality oneconomic growth rate with a panel of cross-country data. Over the past 10
years, a number of empirical tests have been conducted and generated very different

conclusions as discussed in the introduction. Because several recent studies, including Li

and Zou (1998), Forbes (2000) and Barro (2000), were based on the set of Gini coefficients
of Deininger and Squire (1996), for the purpose of comparison, we use the same set of Gini

coefficients. In addition, we also use the data from Barro-Lee data set (which is

downloadable from the website listed in the reference). These data sets involve 138
countries from 1960 to 1990, and 131 of these countries have at least one Gini coefficient

observation. One period in the panel data set is chosen to be five years. Thus, the maximum

number of periods is six. The per capita GDP is determined at the beginning of each
five-year period, but the other measures including the growth rate of per capita GDP are

determined by average value over a five-year time period. For Gini coefficients, considering

the absence of observations, the average value is calculated by

average( ginit ) = ∑（ginit）/ n , (28)
t∈D
Where D is the set of the years that have Gini coefficient observations, and n is the

number of the years with Gini coefficient observations. We follow the definitions of
Deiniger and Squire (1996): “accept” means that the data are in high quality data set, and

“ps” means that the data are excluded from the high quality data set as there is no clear

reference to the primary source. If both ‘accept’ and ‘ps’ data are available in one year, the
‘accept’ data will be used. As in Barro (2000), we use both the ‘accept’ and ‘ps’ data in the

empirical study. There are two advantages for this approach: (1) using larger data sets; and

(2) facilitating the comparisons between Barro (2000)’s findings and our results.

4.2 Empirical Consistency Tests

We now investigate the consistency between Gini coefficient and F (λm ) empirically
using regression analysis with Deininger and Squire (1996)’s data set. The regression

equation can be written as

14
 gini = f ( q1 , q2 , q3 , q4 ) + u~ . (37)
where qi is the i th quintile of the income distribution, with group 1 being the poorest and

group 5 being the richest. The results are listed in Table 2 and Table 3. Note that when ε

equals 0.2, 0.4,0.6 and 0.8 respectively, the L(ε ) is the same as q1 , q1 + q2 ,
q1 + q2 + q3 , q1 + q2 + q3 + q4 . Moreover, F (λm ) can be approximated by q3 . Thus, we
can test the consistency between the Gini coefficient and L(ε ) or F (λm ) by correlation

and regression analysis. In Table 2, all correlation coefficients between the Gini coefficient
and q1 , q1 + q2 , q1 + q2 + q3 , q1 + q2 + q3 + q4 , and q3 are negative, indicating strong

negative relationships between the Gini coefficient and L(ε ) , or F (λm ) . Moreover, in

Table 3, the regression coefficient of q1 (see equation E1 ) is negative and highly

significant. Considering the negative correlation between the Gini coefficient and q1 in

Table 2, we conclude that the sorted orders for a set of income distributions with Gini

coefficients and L(ε ) (here ε equals to 0.2) are empirically consistent. Furthermore,
when ε equals 0.4, 0.6 and 0.8, the corresponding regressions E 2 , E 3 and E 4 show

the same conclusions, respectively.

For equation E5 in Table 3, the regression coefficient of q3 is also negative and is

significant at 1% level. Because we use q3 as the proxy variable of F (λm ) , the result of

E5 shows the consistency between the Gini coefficient and F (λm ) empirically.
As a summary, Table 2 and Table 3 provide empirical evidence to support the
assumption that three income inequality indices are consistent. That is a larger Gini

coefficient, or a smaller L(ε ) , or a smaller F (λm ) corresponds to a higher income

inequality.

4.3 Regression Approach to Empirical Analysis

Previous empirical studies were performed by using several estimation methods, such
as the ordinary least squares estimation (OLS) in Alesina and Rodrik (1994) and Persson

and Tabellini (1994), the estimation with fixed or random effects in Li and Zou (1998) and

Forbes (2000), and the three-stage least squares method in Barro (2000). Distinguished from
those studies, we use a cross-section weighted regression approach. In this method, the

weights of sections are estimated from a first-stage pooled OLS regression, and a feasible

15
generalized least squares method (FGLS) is performed subsequently. In principle, the FGLS
method is more appropriate for the situation where there exists cross-section

heteroskedasticity. According to the result of the White’s general test with the basic

regression in the second column of Table 5, the Chi-squared value is 28.59540. Therefore,
there does exist the heteroskedasticity at 5 percent of significance level (p-value is

0.011848). If there exist both cross-section heteroskedasticity and contemporaneous

correlation, the seemingly unrelated regression method (SUR) may be a more reasonable
one for empirical studies. However, in our studies, the number of cross-sections is so large,

compared to the number of time periods that the residual correlation matrix can be near

singular when using the SUR method. Thus, we do not use the SUR in our empirical
analysis.

4.4 Government Expenditures and Per Capita GDP

As mentioned in Alesina and Rodrik (1994), a reasonable empirical test for a

theoretical model should consist of two stages: first to test the positive relationship between

redistributing policies and income inequality, and secondly to test the negative relationship
between redistributing policies and economic growth rate. Unfortunately, this method is not

feasible in our situation due to lack of redistribution policies data. Therefore, we directly test

the effects of income inequality on economic growth. We first test the important assumption
in developing our model. This assumption implies that the ratio of fixed government

expenditure to aggregate expenditure decreases with per capita GDP. Because of lack of the

cross-country data about theses ratios, we consider the ratio of ‘government consumption’
expenditure to GDP as a proxy variable. Note that these two types of ratios are positively

related. The values of this proxy variable are obtainable in the date set of Barro-Lee’s (1994).

The regression results are in Table 4, where the dependent variable is the ratio of
‘government consumption’ expenditure to GDP and the independent variable is the

logarithm of per capita GDP. The first and second rows are results from OLS and FGLS

regressions, respectively, with the full sample data (710 observations). The third row is the
panel regression with random effects for the full sample data. The rows 4 to 6 are the

regressions with the Gini coefficient samples. It is found that all coefficients for the

16
logarithm of per capita GDP are negative. In other words, we empirically verified the
negative relationship between the per capita GDP and the ratio of the ‘government

consumption’ expenditure to GDP. From these regression coefficients, we see that for a 1%

increase in per capita GDP, the ratio of ‘government consumption’ expenditure to GDP will
decrease by about 0.03 percent.

4.5 Basic Regression and Inverted-U Relationships

To test the relationship between income inequality and growth, we use a basic

regression equation as:

rit = f ( ginii ,t −1 , gdp i ,t −1 , inv i ,t −1 , ft i ,t −1 , sc i ,t −1 ) + µ it . (30)

In (30), the country index i = 1,2,..., N , the 5-year period index t = 1,2,..., T , rit is the

growth rate of per capita GDP, giniit is the Gini coefficient for country i in period t ,

whose value is in(0, 100), gdp i ,t , is per capita GDP for country i in period t , which is
determined at the beginning year of period t , inv i ,t is the ratio of domestic investment

to GDP, ft i ,t is the total fertility rate, and finally, sc i ,t , stands for the average schooling

years of people over age 25.

First, we remove giniit from the basic regression (30) and use FGLS regression

method. The results are shown in Table 5. One interesting finding is that the coefficient of

sc i ,t shows a negative relationship between economic growth and education attainment. In

fact, our result shows that for a 1% increase in sc i ,t , given other things are held fixed, the

growth rate of per capita GDP will decrease by about 0.009 percent. This result is different

from the results in Alesina and Rodrik (1994) and Barro (2000), but is consistent with the
results in Li and Zou (1998) and Pritchett(1996).

In Table 6, the regression coefficients imply that there exists an inverted-U relationship

between economic growth rate and per capita GDP. The regression coefficients of log(GDP)
and log2(GDP) indicate that as the per capita GDP increases, the economic growth rate will

first increase and then decrease. Our computational model in section 3 has indicated this

inverted-U shaped relationship. In Figure 2, for a given Gini coefficient, a clear inverted-U
relationship can be shown in the plane of economic growth rate and per capita GDP.

Graphically, Figure 4 shows a curve for the inverted-U relationship between economic

17
growth rate and per capita GDP.

4.6 Effects of Income Inequality on Economic Growth

Using the basic regression (30), we examine empirically the effect of a larger Gini
coefficient (an increase in income inequality) on economic growth. The tests are based on

four economic growth regression models in Table 7: Reg.1 is the regression with Gini and

log(Gini ) * log(GDP ) ; Reg.2 is the regression with log(Gini ) * (GDP ) 0.2 and Gini ;
Reg.3 is the regression with Gini and Gini * log(GDP ) ; and Reg.4 is the regression with

Gini . The regression method for Reg.1, Reg.2 and Reg.3 is FGLS; and Reg.4 is a panel

regression with fixed effect. From Reg.1, we obtain

∂r log(GDP)
≈ -0.001263 + 0.006144 × . (31)
∂ (Gini ) Gini

where r is the growth rate of per capita GDP. From (31), with a lower per capita GDP,

there exists a negative relationship between economic growth and income inequality
(measured by the Gini coefficient). On the other hand, with a higher per capita GDP, there

exists a positive relationship between economic growth and income inequality. The turning

point or the threshold of income level is influenced by the Gini coefficient as follows:
GDP* ≈ exp{0.205566 × Gini} . (32)

where GDP* is the turning point per capita GDP. Obviously, with a larger Gini coefficient,

there must be a higher turning point.

Reg.2 shows a similar relationship between economic growth and Gini coefficient. In

this case, the threshold level of per capita GDP is determined by

GDP* ≈ (0.129132 × Gini ) .

5
(33)
For example, from (32), (33), for a country with the Gini coefficient of about 0.48 (close to

the data of China in 2002, (32) and (33) give the threshold levels of per capita GDP of $

19267 and $9149 (in 1985 dollars), respectively. Because the Chinese per capita GDP is far
lower than this value in 2002, a higher income inequality will thus hurt its economic growth.

On the other hand, for a country with the Gini coefficient of about 0.37 (close to the data of

the United States in 1985), (32) and (33) yields the threshold levels of per capita GDP of $
2008 and $ 2490 (in 1985 dollars), respectively. Since the US per capita GDP is much

18
higher than this value in 1985, a higher income inequality will thus facilitate the economic
growth. These results support the prediction from our model.

The regression coefficients in Reg.3 show that there exists a turning point or threshold

levelfor per capita GDP, and in a country with per capita GDP below the threshold level, the
effect of income inequality on economic growth is negative. However, in a country with per

capita GDP above this level, the effect of income inequality on economic growth is positive.

Here, the turning point’s value is about $ 2751 (in 1985 dollars) which is fairly close to
$2070 (in 1985 dollars), the result of Barro (2000), although the method in Barro (2000) is

the three-stage least squares regression. Obviously, Reg.3 replicates the results in Barro

(2000).
Reg.4 shows that, if the fixed effects are considered, there will be a significantly

positive relationship between Gini coefficient and economic growth. Similar empirical

results were also reported by Li and Zou (1998) and Forbes (2000).
As a summary, the four regression models reported in Table 7 show that with real data

sets (a) not only the results in previous studies can be replicated, but also more details about

relationships can be illustrated; and (b) the empirical evidences support the theoretical
prediction from our model.

4.7 Sensitivity Analysis

To test the robustness of the regression results, we perform sensitivity analysis in two

ways. In the first method, according to certain “excluding” criterions, we exclude some

countries from all 138 countries and then perform regression on the remaining countries.
The results are reported in Table 8. The first seven rows are the regression results with the

excluding criterions of ‘region groups’ type, and the next six rows are the results with the

excluding criterions of ‘income groups’ type. In ‘region groups’, we examine seven groups
with different regional combinations. In ‘income groups’, we examine six groups with

different levels of per capita GDP. We still use the FGLS regression. The definitions about

the dependent variable and the independent variables are the same as in Reg.1’s of Table 7.
From these 13 groups in Table 8, we find that 12 of them are similar to Reg.1 in Table 7

except for the group excluding all East Asia countries. In this test, at a significance level less

19
than 5 percent, the regression coefficients are significant and consistent with the prediction
from our computational model. The second method is to use different income inequality

measures. In this method, we substitute the quintiles data (defined and tested in Subsection

4.2) for the Gini coefficient (used in Table 7). The results are listed in Table 9. In Table 9,
we examine six groups with different measures (in the first column X ) of income

inequality, here X = q1 , q2 , q3 , q4 , q1 + q2 , q1 + q2 + q3 respectively. For the independent

variables, considering the different nonlinear forms of regressions, we substitute

log( X ) * (GDP ) 0.7 for log(Gini ) * log(GDP ) , with other independent variables being
the same as Reg.1’s in Table 7. Note that the signs of X and log( X ) * (GDP ) 0.7 are

opposite to these of Gini and log(Gini ) * log(GDP ) in Reg.1 of Table 7. In fact, the
regression coefficients in Table 9 show that the effects of income inequality on economic

growth are similar to the results of Reg.1 and support the prediction of our model. The

sensitivity analyses show that the empirical results are robust and consistent with the
theoretical results from our model.

5. Conclusion

In this paper, we have developed a modified endogenous growth model by considering

the government expenditure as a fixed part plus a variable part. With such a computational
model, we obtain theoretical interpretation of the empirical findings about the relationship

between the income inequality and the economic growth rate reported by Barro (2000).

Moreover, our results show that it is more likely that the income inequality hurts the
economic growth of poor countries with lower per capita GDP and encourages the economic

growth of rich countries with higher per capital GDP. The threshold value for distinguishing

between poor and rich countries is jointly determined by the level of income inequality and
the per capita GDP in a positively correlated way.

Based on this study, it is believed that income inequality level affects economic growth

rate via the proportion of social resources allocated to non-productive activities. In our
model, this non-productive resource consumption is represented by the government

expenditure. In fact, if we regard the government expenditure as the allocation of social

20
resources to non-productive spending, the model developed is more general in application.
The theoretical results obtained from our model are consistent with the empirical results

based on cross-country data. Furthermore, the robustness of empirical results is shown by

sensitivity analysis. The empirical evidence indicates that the model has captured the
fundamental relationship between income inequality and economic growth. The insights

gained from this study will offer policy makers of both rich and poor countries useful

information in their economic development planning and decision making.

21
 Appendix A: Proofs of Propositions

Proof of Proposition 1:
Although households can influence indirectly both g and xit through voting, they take
the paths of g and xit as given after voting. For household λi , its utility maximization

problem is
+∞ ⎡ c it1 − θ − 1 ⎤
Max
c it ∫0
⎢
⎣ 1−θ
+ ln( g − x it ) + v ( x it ) ⎥e − ρ t dt ,
⎦
(A1.1)

subject to kit = (1 − τ ) Ak it − cit .

where τ denotes the given income tax rate. The Hamiltonian function is

⎧ c 1−θ − 1 ⎫
H = ⎨ it + ln( g − x it ) + v ( x it ) + α [(1 − τ ) Ak it − c it ]⎬e − ρt , (A1.2)
⎩ 1−θ ⎭

where α is the costate variable. The optimal conditions for household λi are

cit−θ = α ,

α
= ρ − α (1 − τ ) A .
α
and the transversality condition is
lim αk it e − ρt = 0 . (A1.3)
t →∞

On the balanced growth path, the optimal growth rates of income, consumption and capital

stock are the same. From the optimal conditions, we obtain the optimal growth rate as

cit k it y (1 − τ ) A − ρ
γi = = = it = . (A1.4)
cit k it y it θ

Because all households are homogeneous except for their initial capital holding, the optimal

growth rate is the same for all households. Thus, we have γ i ≡ γ .

Proof of Proposition 2:
From (22), assume that household λi considers X as given or fixed. Taking the first

order derivative with respect to τ , we have

22
 −θ −1
1−θ ⎡ ρ − (1 − τ )(1 − θ ) A ⎤ 1 A
− A ⎣⎡ F (λi )k0 ⎦⎤ ⎢⎣ ⎥⎦ + − =0. (A2.1)
θ τ ρ ρ 2θ

and there exists a desirable tax rate τ as the solution to (A2.1). We show that such a

solution is unique in [0, 1].

dui dui
First, for practical situations, it is easy to show > 0 and <0.
dτ τ →0 + dτ τ =1

Furthermore, from (22), we obtain

−θ − 2
d 2 ui 1−θ 2 ⎡ ρ − (1 − τ )(1 − θ ) A ⎤
=
θ
[
A F (λ i )k 0
2
]
1−θ
⎢⎣ θ ⎥⎦ −
1
. (A2.2)
dτ 2
τ 2ρ

Using (19) and θ > 1 , we have d 2 u i / dτ 2 < 0 . Therefore, there exists a unique desirable
tax rate τ in [0,1] which maximizes the household’s life time utility.

Considering the desirable tax rate as a function of F (λi ) and using (A2.2), we can

obtain

⎧⎪ 2 1 − θ 2 ⎡ ρ − (1 − τ )(1 − θ ) A ⎤
−θ − 2
1 ⎫⎪ dτ
⎨A
θ
[
F (λ i )k 0 ] 1−θ
⎢⎣ θ ⎥⎦ − ⎬
⎪⎩ τ 2 ρ ⎪⎭ d [ F (λ i )]
−θ −1
⎡ ρ − (1 − τ )(1 − θ ) A ⎤
[
= A(1 − θ ) F ( λi )k 0 ] −θ
⎢⎣ θ ⎥⎦ .

(A2.3)

From (A2.3), (19) and θ > 1 , we have

dτ
> 0. (A2.4)
d [ F (λi )]

Similarly, we also have

dτ
> 0. (A2.5)
dk 0

It follows from the median-voter theorem that the median voter’s choice prevails through

the majority voting. Thus, if the median voter’s preferred tax rate τ m is higher than the

‘basic’ tax rate τ f , then the majority will approve to increase the tax rate to τ m , otherwise
the tax rate will be still kept at τ f . Now we show that the median-voter λm = 1 / 2 .

23
 For the household λi = 1/ 2 , we assume τ 1 / 2 as its desirable tax rate. If households
vote on whether the tax rate should be raised from τ 1 / 2 , what will happen? From (A2.4), we

see that as the capital stock increases, the desirable tax rate τ i of household λi will

increase. For every household λi − < 1 / 2 with τ i − as its desirable tax rate, obviously we
have τ i − < τ 1 / 2 . Because the household’s utility function is single-peaked, and

d 2 u i / dτ 2 < 0 , the increase in the tax rate will reduce the utility of every household of
λi − < 1 / 2 . Therefore, all households identified as λi − < 1 / 2 will vote against the tax rate
increase. Similarly, all households identified as λi + > 1 / 2 will vote for the tax rate increase.

For λi ∈ [0,1] , the population is divided by half at λi = 1/ 2 . On the other hand, if

households vote on whether the tax rate should be decreased from τ 1 / 2 , then every
household λi − < 1 / 2 will vote for the tax rate decrease and every household λi + > 1 / 2 will

vote against the tax rate decrease. Similarly, the population divided by half at λi = 1/ 2 .

Therefore, the household λi = 1/ 2 is just the median-voter or λm = 1 / 2 .

Substituting τ m into (A2.1), we obtain
−θ −1
1−θ ⎡ ρ − (1 − τ m )(1 − θ ) A ⎤ 1 A
− A ⎡⎣ F (λm )k0 ⎤⎦ ⎢ ⎥ + − =0. (A2.6)
⎣ θ ⎦ τmρ ρ 2θ

(A2.6) determines the median voter’s preferred tax rate τ m . It follows from (A2.4)
and (A2.5) that

dτ m dτ m
> 0， > 0. (A2.7)
d [ F (λ m )] dk 0

Proof of Proposition 3:
From θ > 1 , we have

lim − A[F ( λm )k 0 ] lim − A[F ( λm )k 0 ]

1−θ 1−θ
=0, and = −∞ .
k0 → +∞ k 0 →0 +

For both sides of (A2.6), letting k 0 → +∞ and k 0 → 0 + ,respectively, we obtain

ρθ
lim τ m = , and lim τ m = 0 . (A3.1)
k0 → +∞ A k 0 →0 +

For both sides (13), letting k 0 → +∞ and k 0 → 0 + , respectively, and using 0 ≤ τ f ≤ 1 ,

we get

24
 lim τ f = 0 ， and lim τ f = 1 . (A3.2)
k0 → +∞ k 0 →0 +

From (A2.7), τ m is monotonically increasing in k 0 and from (13), τ f is monotonically

decreasing in k 0 . Hence, it follows from (A3.1), (A3.2), and the continuity of the involved

functions that there must exist a threshold value k ' > 0 with the following property: if
k 0 < k ' , then τ m < τ f and γ = [(1 − τ f ) A − ρ ] / θ ; if k 0 = k ' , then τ m = τ f ; and if
k 0 > k ' , then τ m > τ f and γ = [(1 − τ m ) A − ρ ] / θ . From (A2.6), (13) and τ m = τ f , we
can compute the value of k ' numerically.

Appendix B: Definitions of Regions

In this paper, the empirical data are from the regions below (countries in each region are

listed by the World Bank country codes).

Africa: DZA, AGO, BEN, BWA, HVO, BDI, CMR, CPV, CAF, TCD, COM, COG,

EGY,ETH, GAB, GMB, GHA, GIN, GNB, CIV, KEN, LSO, LBR, MDG, MWI, MLI,

MRT, MUS,MAR, MOZ, NER, NGA, RWA, SEN, SYC, SLE, SOM, ZAF, SDN, SWZ,
TZA, TGO, TUN,UGA, ZAR, ZMB, ZWE.

Asia: East Asia + No-East Asia.

East Asia: BUR, CHN, HKG, IDN, JPN, KOR, MYS, PHL, SGP, OAN, THA.
No-East Asia: AFG, BHR, BGD, IND, IRN, IRQ, ISR, JOR, KWT, NPL, OMN, PAK,

SAU,LKA, SYR, ARE, YEM.

America: North America + South America.

North America: BHS, BRB, CAN, CRI, DMA, DOM, SLV, GRD, GTM, HTI, HND,

JAM,MEX, NIC, PAN, LCA, VCT, TTO, USA.

South America: ARG, BOL, BRA, CHL, COL, ECU, GUY, PRY, PER, SUR, URY, VEN.

25
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27
 1

0.9

L1
0.8
L2
0.7
L3
0.6

0.5

0.4

0.3

0.2

0.1

0
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

Figure 1
An Example of Lorenze Curves

28
 Figure 2

Graph of Economic Growth Rate v.s. Gini Coefficient and Per Capita Real GDP

29
 Figure 3
Turning Point, Gini Coefficient and Per Capita Real GDP

30
 12

10

P 6
D
G
at
pi 4
a
cr
e
p
al 2
er
f
o
et 0
ar
ht
w
or -2
G

-4

-6

-8
5.5 6 6.5 7 7.5 8 8.5 9 9.5 10
log ( per capita GDP )

Figure 4
Economic Growth Rate vs. log( Per Capita Real GDP)

31
Table 1 Simulation Results for Consistency Between Gini Coefficient and F (λ m )

( µ ,σ2) (0.03, 0.2) (0.03,0.3) (0.05,0.2) (0.05,0.3) (0.07,0.2) (0.07,0.3)

Gini, F ( λ m )
4694 4633 4628 4630 4631 4734
are
consistent
frequency 0.9388 0.9266 0.9256 0.9260 0.9262 0.9468

NOTE: The total number of the simulation tests is 5000. The household’s income is

determined by the income in the last test multiplied a random growth rate r , and

r ~ N ( µ , σ 2 ) . In each test, the Gini coefficient and F (λ m ) are generated with simulated
income distribution. Considering the Gini coefficients of most countries are in the interval

[0.3,0.6], we also use this interval in simulation tests.

Table 2 Correlation of Gini and Other Income Definitions

Q1 Q1+Q2 Q1+Q2+Q3 Q1+Q2+Q3+Q4 Q3

Gini -0.873359 -0.938902 -0.971233 -0.982687 -0.979395

32
Table 3 Regressions for Gini Coefficients

Dependent Variable ： Gini Coefficient

E1 E2 E3 E4 E5
C 60.4951 68.8042 76.9884 87.0693 83.5010
(t-statistic) (108.6471) (142.7956) (193.1061) (229.6518) (216.0375)
Q1 -360.9894
(t-statistic) (-46.0994)
Q1+Q2 -130.7318
(t-statistic) (-70.1339)
Q1+Q2+Q3 -68.8944
(t-statistic) (-104.8587)

Q1+Q2+Q3+Q4 -43.9408
(t-statistics) (-136.3648)
Q3 -138.0408
(t-statistic) (-124.6814)
Number of 663 663 663 663 663
observations
R2 0.7628 0.8815 0.9433 0.9657 0.9592

NOTE: The regression method is OLS. In this table, Qi represents Quintilei, i. All regression

coefficients are significant at 1%.

33
Table 4 Regression of Ratio of Government Expenditure to GDP on Per Capita GDP

Independent Constant log(per capita GDP) Number of

variable (t-statistic) (t-statistic) Observations
OLS 0.400122 -0.029862 710
(Full sample) (21.13363) (-12.26755)
FGLS 0.349412 -0.024470 710
(Full sample) (43.71292) (-26.76199)
R-effects 0.238042 -0.008833 * 710
(Full sample) (7.545934) (-2.192960)
OLS 0.426235 -0.033408 290
(Gini sample) (13.88756) (-8.990207)
FGLS 0.392856 -0.029557 290
(Gini sample) (41.44354) (-27.25769)
R-effects 0.241968 -0.010948 * 290
(Gini sample) (5.833792) (-2.209658)

NOTE: The regression coefficients with ‘*’ are significant at 5 percent level, the other

coefficients are significant at 1 percent level..

34
Table 5 Basic Regressions for Economic Growth

Dependent Variable： Growth rate of per capita real GDP

Independent Full Sample Full Sample Gini Sample
Variable (OLS) (FGLS) (FGLS)
Constant -0.307071 -0.371875 -0.352003
(t-statistic) (-3.369124) (-5.416533) (-6.168706)
log(per capita GDP) 0.081725 0.081254 0.084962
(t-statistic) (3.520959) (4.523141) (5.978662)
log(per capita GDP) squared -0.004992 -0.004471 -0.005004
(t-statistic) (-3.411011) (-3.943657) (-5.551183)
Investment/GDP 0.110098 0.132535 0.119757
(t-statistic) (5.328184) (9.673824) (10.61729)
log(total fertility rate) 0.013367 0.007543
(t-statistic) (3.185478) (2.746699)
log(year of schooling) -0.007959 -0.008566 -0.009055
(t-statistic) (-3.181177) (-4.204723) (-3.499599)

government "consumption" -0.075721

expenditure/GDP (t-statistic) (-3.555071)

Number of observations 492 456 207

D.W. 1.790814 1.667105 1.918590

R2 0.148695 0.519559 0.920201

NOTE: In this table, the regression method is FGLS regression. The ‘total fertility rate’
is the average number of children fostered by every woman in her lifetime. The ‘years

of schooling’ is the average schooling years for those of 25 years age or older in the

population. All regression coefficients are significant at 1 percent level.

35
Table 6 Regressions Showing Invert-U relationship

Dependent Growth rate of per capita real

Variable GDP
Full sample Gini Sample

Constant -0.316309 -0.402623

(t-statistic) (-4.655832) (-3.221723)
log(per capita GDP) 0.078889 0.102348
(t-statistic) (4.468577) (3.284189)
log(per capita GDP) squared -0.004511 -0.006028
(t-statistic) (-3.987104) (-3.135510)

Number of observations 702 289

NOTE: In this table, the regression method is OLS. All regression coefficients are

significant at 1 percent level.

36
 Table 7 Effects of Gini Coefficients on economic growth
Dependent Variable ： Growth rate of per capita real GDP
Independent Variables Reg. 1 Reg. 2 Reg. 3 Reg. 4
Constant Coefficient -0.282186 -0.372383 -0.228310 *
(t-statistic) (-3.503682) (-5.127964) (-2.190375)
Log(GDP) Coefficient 0.058592 0.094308 0.063153 0.325601
(t-statistic) (2.601019) (5.028602) (2.723581) (5.502072)
(log(GDP) )2 Coefficient -0.004806 -0.007473 -0.004242 -0.015530
(t-statistic) (-4.003463) (-5.493059) (-3.325443) (-4.352849)
Investment / GDP Coefficient 0.112641 0.114483 0.120806
(t-statistic) (9.311627) (9.532974) (10.48412)
Log( total fertility rate) Coefficient 0.007052 ** 0.006955 * 0.007659 * 0.062953
(t-statistic) (1.911166) (1.968563) (2.521064) (6.063633)
Log( years of schooling ) Coefficient -0.007787 -0.007898 -0.008632 -0.052882
(t-statistic) (-2.933211) (-2.955963) (-3.198551) (-12.33873)
Gini Coefficient -0.001263 -0.001039 -0.001996 * 0.000603
(t-statistic) (-2.748489) (-2.788867) (-2.041887) (3.126793)
Gini*log(GDP) Coefficient 0.000252 *
(t-statistic) (2.033415)
log(Gini)*log( GDP) Coefficient 0.006144
(t-statistic) (2.810520)
log(Gini)*( GDP)0.2 Coefficient 0.008046
(t-statistic) (2.949362)
Nmber of observations 207 207 207 207
D.W. 1.926154 1.936583 1.939338 1.848563

Note: * In this table, item ‘GDP’ represents per capita real GDP (1985 US dollars). For all regression coefficients, the coefficients with ‘*’ are significant

at 5percent level, the coefficient with ‘**’ is significant at 6 percent level, and the other coefficients are significant at 1 percent level.

37
1
Table 8 Sensitivity I : ‘Region groups’ and ‘Income groups’
Dependent Variable ： Growth rate of per capita real GDP
log(Gini)*
Region groups Gini Number of D.W.
log( GDP)
/ Income groups (t-statistic) Observations R2
(t-statistic)
All – Africa -0.001208 0.005550 1.959366
(-3.561387) (3.075309) 183 0.906874
All - East Asia -0.000487 ** 0.002604 *** 2.021476
176
(-1.736462) (1.562511) 0.999351
All – No-East Asia -0.001710 0.007711 1.847600
184
(-3.522673) (3.407651) 0.890528
All – North America -0.001410 0.006404 2.022368
173
(-3.090361) (2.926082) 0.997011
All – South America -0.001970 0.008738 1.940353
184
(-4.280169) (3.913932) 0.998294
All – America -0.001414 * 0.006572 * 2.105859
150
(N. & S.) (-2.315963) (2.357995) 0.746441
All-Africa-South -0.001270 * 0.005763 * 1.990116
160
America (-2.554922) (2.473518) 0.699371
GDP (1985) > $500 -0.001475 0.006273 1.911881
202
(-3.147022) (2.893146) 0.986106
GDP (1985) > $1000 -0.001443 0.006354 1.970818
186
(-5.099524) (3.782994) 0.931887
GDP (1985) > $1500 -0.001406 * 0.005833 * 1.964903
172
(-2.339460) (2.257085) 0.890821
GDP (1985) > $2000 -0.001522 * 0.006420 * 1.962297
160
(-2.192945) (2.232647) 0.881949
GDP (1985) > $2500 -0.001930 0.007761 1.929637
144
(-2.617792) (2.647830) 0.836006
GDP (1985) > $3000 -0.001791 * 0.006958 * 2.027133
134
(-2.340439) (2.318404) 0.929551

NOTE: In this table, ‘All – Africa ’ means that the data set includes all countries except the
African countries, and ‘GDP (1985) > $500’ means that the data set includes every country

whose per capita real GDP (in 1985 US dollars) is higher than $500 in 1985(1985 US

dollars). The other items are similar. The definitions of all regions can be found in Appendix
B. For all regression coefficient, the coefficients with ‘*’ are significant at 5 percent level,

and the coefficient with ‘**’ is significant at 10 percent level. The p-value of coefficient

with ‘***’ is 0.120000, and the other coefficients are significant at 1 percent level.

138
Table 9 Sensitivity II : Quintile-based Inequality Measure Indices*
Dependent Variable： Growth rate of per capita real GDP
Inequality log(X)*
X Number of D.W.
measure indices ( GDP)0.7
(t-statistic) Observations R2
X (t-statistic)

X=Q1 0.282917 -4.78E-05 2.025606

169
(3.418679) (-4.068465) 0.843022

X=Q2 0.151723 -7.40E-05 2.026989

(2.871455) (-3.593735) 169 0.797205

X=Q3 0.082399 * -0.000101 2.038014

(2.520641) (-3.396911) 169 0.784041

X=Q 4 0.064584 -0.000168 2.003813

(3.031560) (-3.998957) 169 0.997969

X=Q1 +Q2 0.087341 -5.97E-05 2.008546

(3.244871) (-3.677645) 169 0.883838

X=Q1+Q2+Q3 0.035907 -6.81E-05 1.971482

169
(2.764036) (-3.085366) 0.941331

NOTE: In this table, ‘GDP’ represents per capita real GDP (in 1985 US Dollars). In all

regression coefficients, the coefficient with ‘*’ is significant at 5 percent level, and the other

coefficients are significant at 1 percent level.

39
2