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Theoretical Economics Paper
Roads to Equality: Wealth Distribution Dynamics with Public-Private Capital Complementarity
Francisco H.G. Ferreira
April 1995
Paper No' TE/1995/286:
Full Paper (pdf)

Tags: wealth distribution; capital market imperfections; inequality; public investment.

This paper proposes a model of wealth distribution dynamics with a capital market imperfection and a production function where public capital is complementary to private capital. A unique invariant steady-state distribution is derived, with three social classes: subsistence workers, 'government dependent' middle-class entrepreneurs and 'private infrastructure owning' upper-class entrepreneurs. It is shown that there is a minimum level of public investment below which the middle class disappears, and that increases in non-targeted public investment over some range lead to unambiguously less inequality of opportunity, as well as to greater output. This provides an additional rationale for an active role for the government in infrastructure, health and education provision, and has implications for foreign aid.