Inequality and Growth: The Role of Beliefs and Culture

Abstract

Governments perpetually align their policies to satisfy shifts in voters' relative demand for economic growth versus social equality. Following such shifts, increases (decreases) in government interventions lower (raise) both inequality and growth. This pattern is stronger in egalitarian countries, where a culturally determined belief in luck as main source of income heterogeneity renders both equality and growth to be important policy objectives. I provide robust empirical support for this mechanism in a panel of 38 countries over the period 1964-2004. I also suggest a simple extension to the theoretical framework of Alesina and Angeletos (2005) to analytically motivate it.

Keywords: culture, inequality, growth

JEL Classification: O15, O40, P16, Z1