Proponents of this view argue that an unequal distribution of rewards, such as higher incomes or profits,
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They suggest that if everyone had equal incomes and wealth, there might be less motivation to pursue entrepreneurial endeavours or invest in new technologies. In this sense, a certain level of inequality can spur economic progress. For example, consider a scenario where a country implements policies to redistribute all wealth and income equally among its citizens. In this situation, individuals may lack the motivation to start their own businesses or invest in new technologies, since their efforts would not result in any significant financial gain. Consequently, the lack of inequality would stifle innovation and impede economic growth. However, by allowing for some level of unequal distribution of rewards, individuals are provided with an incentive to work harder, take risks, and contribute to the overall.
An example of a country with a high level of inequality and economic growth is the United States. Despite having one of the highest levels of income inequality among developed nations, it has consistently experienced economic growth over the years. This can be attributed to factors such as a robust entrepreneurial ecosystem, where individuals are motivated to start their own businesses due to the potential for significant financial rewards. Silicon Valley in California serves as an exemplary center for technological innovation and economic growth, fueled by the prospect of substantial returns on investment.
The Incentive Effects of Inequality: An Experimental Investigation" by Timothy J. Taylor and Michael S. Weisbach (1996)
This paper finds that income inequality can increase productivity, especially among high-wage workers. The authors argue that this is because income inequality motivates workers to work harder and smarter and innovative to earn more money and achieve a higher social status.
The Impact of Income Inequality on Economic Growth" by the Bertelsmann Stiftung (2015)
This paper finds that a moderate level of income inequality can have a positive impact on economic growth. The authors argue that this is because inequality provides individuals with incentives to work harder, invest, and take risks.
Optimal Taxation and Public Production: I--Production Efficiency by Peter Diamond and James Mirrlees, published in the American Economic Review in 1971.
In this paper, Diamond and Peter argue that high inequality provides the incentives to work harder, invest and undertake risks to take advantage of high rates of return.
For example, if highly educated people are much more productive, then high differences in rates of return may encourage more people to seek education.
Lazear and Rosen (1981) also discuss the effects of income inequality on labor supply and investment in their paper, "Rank-Order Tournaments as Optimum Labor Contracts."
They argue that income inequality can motivate workers to perform better by creating a competitive environment in which workers are rewarded for their relative performance.
Kaldor (1956) and Bourguignon (1981) are two economists who have written extensively on the relationship between income inequality and economic growth.
Kaldor argued that income inequality can be beneficial for economic growth because it leads to higher savings rates. He argued that the rich have a higher marginal propensity to save than the poor, meaning that they save a larger proportion of their income. This higher savings rate leads to capital accumulation, which in turn drives economic growth.
Bourguignon built on Kaldor's work by considering the role of human capital accumulation in economic growth. He argued that income inequality can also be beneficial for economic growth because it provides incentives for people to invest in their education skills and become innovative. This is because people with higher levels of education and skills are more likely to be employed in high-paying jobs.
Another example of a country with a higher level of inequality and higher economic growth is China. In recent decades, China has experienced rapid economic development, with a significant increase in income inequality. This has been attributed to the country's transition from a centrally planned economy to a market-oriented one. The unequal distribution of rewards in China has incentivized individuals to work harder, invest in new businesses, and contribute to the overall growth of the economy.
International Marketing And Export Management
ISBN: 9781292016924
8th Edition
Authors: Gerald Albaum , Alexander Josiassen , Edwin Duerr