How Do Mean Division Shares Affect Growth and Development?

Headnote

Summary: The Gini coefficient is widely used in academia to discuss how income inequality affects development and growth. However, different Lorenz curves may provide different development and growth outcomes while still leading to the same Gini coefficient. This paper studies the development effects of "mean division shares", i.e., the share of income (mean income share) held by people whose household disposable income per capita is below the mean income and the share of the population (mean population share) with this income, using panel data. Our analysis explores how this income share and population share impact development and growth. It shows that the income and population shares affect growth in significantly different ways and that an analysis of these metrics provides substantial value compared to that of the Gini coefficient.

Key words: Income inequality, Mean division shares, Growth.

JEL: C36, D31, O11.

(ProQuest: ... denotes formulae omitted.)

Academia has continued to debate how income distribution affects development and growth since Kuznets's hypothesis was proposed in 1955. There are two fundamental issues with this issue. The first relates to measuring (relative) income inequality. Summary indices are the most popular tools for measuring inequality; economists have found that many summary measurements are unable to provide strictly Lorenz ranking regarding income distributions, and that the correlations between growth and income inequality may differ in inequality measurement. The other question relates to the mechanics of how income inequality plays a role in production, i.e., how income inequality should enter a production function. Specifically, the functional specification of the macroeconomic effects of income inequality requires justification. This paper seeks to address with these two issues.

This paper studies the development effects of "mean division shares", i.e., the share of income (mean income share) held by people whose household disposable income per capita is below the mean income and the share of the population (mean population share) with this income, using panel data. Our analysis explores how these income share and population shares impact development and growth.

The paper consists of five sections. Section 1 summarizes relevant studies; Section 2 is about the model specification; Section 3 is about the data we will use and the estimation for our measurements; Section 4 is the empirical analysis and Section 5 concludes.

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