Economic growth and inequality: The role of public investment

The relationship between growth and inequality is complex. After discussing some general background issues, motivated by extensive empirical evidence this paper focuses on public investment as a key determinant of the relationship. Two alternative frameworks, each offering sharply contrasting perspectives, are presented. The first employs the “representative consumer theory of distribution” where agent heterogeneity originates with wealth endowments. It yields an equilibrium in which aggregate dynamics drives distributional dynamics. In the second, agent heterogeneity arises from idiosyncratic productivity shocks and generates an equilibrium in which distributional dynamics drive growth. The impact of government investment on growth and inequality are shown to contrast sharply in the two approaches, thus illustrating the complexity of the growth-inequality relationship.