Effects of Income Inequality on Aggregate Output

This paper estimates the effect of
income inequality on real gross domestic product per capita
using a panel of 104 countries during the period 1970–2010.
The empirical analysis addresses endogeneity issues by using
instrumental variables estimation and controlling for
country and time fixed effects. The analysis finds that, on
average, income inequality has a significant negative effect
on transitional gross domestic product per capita growth and
the long-run level of gross domestic product per capita.
However, the impact varies by the level of economic
development, so much so that in poor countries income
inequality has a significant positive effect on gross
domestic product per capita.