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Inequality and growth: The cholesterol hypothesis

Author

Listed:
  • Gustavo A. Marrero

    (Universidad de la Laguna)

  • Juan Gabriel Rodríguez

    (Universidad Complutense de Madrid)

Abstract
A fundamental unsolved question in economics is whether inequality is good or bad for growth. We argue here that this lack of consensus is due to the cholesterol hypothesis. This hypothesis states that the part of inequality generated by factors beyond the individuals’ control, referred to as inequality of opportunity (IO), is growth-deterring, while the type of inequality generated by the difference in the willingness to exert effort, referred to as inequality of pure effort (IE), is growth-enhancing. We first build an overlapping generation model with human capital to derive a reduced-form growth equation consistent with this hypothesis, and the existing interaction between poverty and inequality. Then, given the inherent difficulty to decompose total inequality into IO and IE, we develop a strategy to test the cholesterol hypothesis: by extending the standard inequality-growth equation with a proxy of IO, the estimated coefficient of inequality must increase, while the coefficient of the IO proxy must be negative. Next, we use the best available data at worldwide level and, given the limitations of the existing IO indices, we construct an alternative proxy of IO by considering that the quality of institutions and ethnic and religious tensions are relevant macroeconomic drivers of IO. Using an instrumental variable approach and different samples and IO measures, our results do not reject the cholesterol hypothesis at worldwide level.

Suggested Citation

  • Gustavo A. Marrero & Juan Gabriel Rodríguez, 2019. "Inequality and growth: The cholesterol hypothesis," Working Papers 501, ECINEQ, Society for the Study of Economic Inequality.
    • Handle: RePEc:inq:inqwps:ecineq2019-501
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    File URL: http://www.ecineq.org/milano/WP/ECINEQ2019-501.pdf
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    2. Pedro Salas-Rojo & Juan Gabriel Rodríguez, 2022. "Inheritances and wealth inequality: a machine learning approach," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 20(1), pages 27-51, March.
    3. David Pérez-Mesa & Gustavo A. Marrero & Sara Darias-Curvo, 2020. "Child health inequality and opportunities in Sub-Saharan Africa," Working Papers 557, ECINEQ, Society for the Study of Economic Inequality.
    4. Pérez-Mesa, David & Marrero, Gustavo A. & Darias-Curvo, Sara, 2021. "Child health inequality in Sub-Saharan Africa," MPRA Paper 108801, University Library of Munich, Germany.
    5. Leopoldo Cabrera & Gustavo A. Marrero & Juan Gabriel Rodríguez & Pedro Salas-Rojo, 2021. "Inequality of Opportunity in Spain: New Insights from New Data," Hacienda Pública Española / Review of Public Economics, IEF, vol. 237(2), pages 153-185, June.
    6. Rafael Carranza, 2020. "Inequality of Outcomes, Inequality of Opportunity, and Economic Growth," Working Papers 534, ECINEQ, Society for the Study of Economic Inequality.

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    More about this item

    Keywords

    growth; inequality; inequality of opportunity; poverty; human capital.;
    All these keywords.

    JEL classification:

    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty

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