INEQUALITY, GROWTH AND CONGESTED EXTERNALITIES: A THEORETICAL AND EMPIRICAL ANALYSIS

Author

BABATUNDE AIYEMO, Southern Illinois University CarbondaleFollow

Date of Award

5-1-2015

Degree Name

Doctor of Philosophy

Department

Economics

First Advisor

MORSHED, MAHBUB

Abstract

In this three-part essay, we explore the classical issue of the interplay between inequality and growth and the role of government in the underlying dynamics using modern macroeconomic analytical tools and and econometric methods. In the first chapter, we frame the issues within an environment of endogenous labor supply where the government serves as both a facilitator of production and a source of redistribution. Herein we model and numerically simulate the effects on inequality and growth of an expansionary fiscal policy in the harnessing of externalities emanating from productive government capital which is subject to relative congestion. The results from this assessment indicate that congestion accelerates the time-path to steady-state convergence while moderating the distributional consequences of fiscal expansions and strengthening the potential for a tradeoff between instantaneous and long-run policy outcomes. Through numerical simulations we further demonstrate the inability of the capital income tax to ensure redistribution in the long run for significantly high levels of congestion such that the sole possibility for the joint realization of economic growth and decreasing inequality resides in the deployment of a hybrid tax scheme which disproportionately strengthens the return to labor. In the second chapter, we explore the distributional properties of the Barro (1990) model of productive government spending in the presence of endogenous labor, distortionary taxes and congestion externalities. We derive an optimal tax combination and demonstrate the effects on growth and inequality which arise from its enablement in circumstances where the government share is both optimally and sub-optimally determined for varying levels of congestion. Utilizing the endogenous response of labor to capital ownership, we show that depending on the tax regime adopted, a conflict between equity and efficiency exists regardless of whether inequality is evaluated in terms of income or welfare. In the third chapter, we utilize an extensive database to establish the strength of response of poverty to changes in economic growth as being positively influenced by improving institutional indices where poverty is evaluated at the $2.00/day margin. Accordingly, we establish the possibility that the war against poverty can be fought as much by policies that promote growth as by the effectuation of structural reforms which advance healthy economic development.