Infrastructure and Inequality

35 Pages Posted: 5 Mar 2008 Last revised: 14 Jan 2013

See all articles by Santanu Chatterjee

Santanu Chatterjee

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics

Stephen J. Turnovsky

University of Washington - Institute for Economic Research; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: June 30, 2012

Abstract

We develop a model in which public capital is both an engine of growth and a determinant of the distributions of wealth, income, and welfare. Government investment increases wealth inequality over time, regardless of its financing. The time path of income inequality is, however, highly sensitive to financing policies, and is often characterized by sharp intertemporal tradeoffs, with income inequality declining in the short run but increasing in the long run. Public investment generates a positive correlation between growth and income inequality along the transition path, but their short-run and long-run relationship depends critically on (i) how externalities impinge on allocation decisions, (ii) financing policies, and (iii) the time period of consideration. Finally, these policies also generate sharp trade-offs between average welfare and its distribution, with government investment improving average welfare, but also increasing its dispersion. Our results are obtained numerically but extensive sensitivity analysis confirms their robustness across key parameter values.

Keywords: Infrastructure, Public investment, Inequality, Equity, Distribution, Economic Growth, Fiscal Policy

JEL Classification: D31, D33, E25, H54, O15

Suggested Citation

Chatterjee, Santanu and Turnovsky, Stephen J., Infrastructure and Inequality (June 30, 2012). Available at SSRN: https://ssrn.com/abstract=1100163 or http://dx.doi.org/10.2139/ssrn.1100163

Santanu Chatterjee (Contact Author)

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics ( email )

Department of Economics
University of Georgia
Athens, GA 30602
United States
706-542-1709 (Phone)

HOME PAGE: http://https://sites.google.com/view/schatterjee/home

Stephen J. Turnovsky

University of Washington - Institute for Economic Research ( email )

Seattle, WA 98195
United States
206-685-8028 (Phone)
206-543-5955 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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