Lucas vs. Lucas: On Inequality and Growth

Abstract

This Working Paper should not be reported as representing the views of the IMFThe views expressed in this Working Paper are those of the authors and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the authors and are published to elicit comments and to further debate.Lucas (2004) asserts that "Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution... The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production." In this paper we evaluate this claim using an extended version of Lucas' (1987) welfare-evaluation framework. Surprisingly, we find that the welfare costs of inequality outweigh the benefits of growth in most cases. These calculations support the case for a research agenda that treats not only growth but also inequality as a priority. JEL Classification Numbers: E1, E2, D3

Insurance and opportunities: A welfare analysis of labor market risk

“…Other authors have addressed this question formally within models where there is a trade-off between inequality and growth (Cordoba and Verdier, 2007) or where inequality has benefits associated to incentive provision (Phelan, 2006). In our framework, the answer depends on whether dispersion is insurable.…”

Endogenous Risk and Growth

“…This conjecture deserves rigorous analysis, and variations on our model can relax perfect consumption insurance and introduce frictions. Motivated by Lucas (1987) and the welfare cost of business cycles literature, Cordoba and Verdier (2007) postulates an ad hoc technological frontier equation relating the consumption process to inequality as a constraint in the planner problem. A version of our model with aggregate shocks would provide a micro-foundation to replace this ad hoc equation and endogenously determine the relationship between growth, inequality, and social welfare.…”

An index of macroeconomic performance

“…11. Indeed, recent evidence presented by Córdoba andVerdier (2007) using Lucas's (1987) welfare-evaluation framework suggests that the welfare costs of inequality outweigh the benefits of growth. 12.…”