IS THERE AN OPTIMAL RATE OF INEQUALITY? Empirical evidence from a panel of 112 countries

Abstract

This paper provides a conciliatory argument to the debate over the relationship between income inequality and economic growth by proposing that the disparities in most previous empirical studies derive from the fact that they have not accounted for the level of inequality as a factor that can define the sign of the relationship. An inverted U shaped relationship is demonstrated, showing that low levels of inequality exert a positive correlation with economic growth while high levels depict a negative one. Additionally, it is demonstrated that the existence of an Optimal Rate of Inequality (ORI) that maximizes growth rates in comparison to other inequality levels, and releases the economy from any distortion generated by high inequality or high redistribution and the associated taxation levels. Empirical evidence from a broad panel of countries as well as a bibliometric analysis is presented to validate these propositions.