Is inequality harmful for growth? We suggest that it is. In a society where distributional conflict is important, political decisions produce economic policies that tax investment and growth-promoting activities in order to redistribute income. The paper formulates a theoretical model that captures this idea. The model's implications are supported by the evidence. Both historical panel data and postwar cross sections indicate a significant and large negative relation between inequality and growth. This relationisonlypresentin democracies.

The arguments that lead us to to this conclusion run as follows. Economic growth is largely determined by the accumulation of capital, human capital, and knowledge usable in production. The incentives for such productive accumulation hinge on the ability of individuals to appropriate privately the fruits of their efforts, which in turn crucially hinges on what tax policies and regulatory policies are adopted. In a society where distributional conflict is more important, political decisions are likely to result in policies that allow less private appropriation and therefore less accumulation and less growth. But the growth rate also depends on political institutions, for it is through the political process that conflicting interests ultimately are aggregated into public-policy decisions.

Next, we confront the model's empirical implications with two sets of data.
The first is an historical panel of nine currently developed countries : the United States and eight European countries. The second sample contains postwar evidence from a broad cross section of countries, both developed and less developed. The predictions of the model hold up in both samples. In particular, a strong negative relation betwen income inequality at the start of the period and growth in the subsequent period is present in both samples.

V. Final Remarks

Drawing on the theories of endogenous economic growth and endogenous economic policy, we formulated a model that relates equilibrium growth to income inequality . The main theoretical result is that income inequality is harmful for growth, because it leads to policies that do not protect property rights and do not allow full private appropriation of returns from investrnent. This implication is strongly supported by the historical evidence of a narrow cross section of countries.