This paper analyzes the role of wealth distribution in macroeconomics through investment in human capital. It is shown that in the presence of credit markets' imperfections and indivisibilities in investment in human capital, the initial distribution of wealth affects aggregate output and investment both in the short and in the long run, as there are multiple steady states. This paper therefore provides an additional explanation for the persistent differences in per-capita output across countries. Furthermore, the paper shows that crosscountry differences in macroeconomic adjustment to aggregate shocks can be attributed, among other factors, to differences in wealth and income distribution across countries. 1. See Kaldor (1956), Kuznets (1955) and a later survey by Cline (1975). 35 10. There are alternative ways to model the bequest motive, but it can be shown that they yield similar results. This issue is discussed in Section 5. 11. This assumption is not critical to any of the results of the paper. Removing it can even strengthen our results. This assumption though reflects, in a somewhat extreme way, the fact that individuals are usually more credit constrained than firms.

This paper develops a unified growth model that captures the historical evolution of population, technology, and output. It encompasses the endogenous transition between three regimes that have characterized economic development. The economy evolves from a Malthusian regime, where technological progress is slow and population growth prevents any sustained rise in income per capita, into a Post-Malthusian regime, where technological progress rises and population growth absorbs only part of output growth. Ultimately, a demographic transition reverses the positive relationship between income and population growth, and the economy enters a Modern Growth regime, with reduced population growth and sustained income growth.

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