DP7569 Inequality and Aggregate Savings in the Neoclassical Growth Model

Author(s): Reto Foellmi
Publication Date: November 2009
Keyword(s): concave consumption function, growth, income distribution, Marginal propensity to consume
JEL(s): D30, O10, O40
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7569

Within the context of the neoclassical growth model I investigate the implications of (initial) endowment inequality when the rich have a higher marginal savings rate than the poor. More unequal societies grow faster in the transition process, and therefore exhibit a higher speed of convergence. Furthermore, there is divergence in consumption and lifetime wealth if the rich exhibit a higher intertemporal elasticity of substitution. Unlike the Solow-Stiglitz model, the steady state is always unique although the consumption function is concave.