Abstract
This paper argues thatthe interaction between inequality and the demand patterns forgoods is a potential source of persistent inequality. Incomedistribution, in the presence of non-homothetic preferences,affects the demand for goods and, due to differences in factorintensities across sectors, it alters the return to factors ofproduction and the initial distribution of income. Low inequalityleads to high demand for medium skilled intensive goods, providinga bridge over which low skill dynasties may transition to thehigh-skilled sector in the long run. Under high inequality however,the initial lack of demand for medium skilled labor breachesthis bridge from poverty to prosperity and inequality persists.
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Mani, A. Income Distribution and the Demand Constraint. Journal of Economic Growth 6, 107–133 (2001). https://doi.org/10.1023/A:1011326523470
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DOI: https://doi.org/10.1023/A:1011326523470