Dissecting the GINI Coefficient for Income and Wealth: Effects of Top and Bottom Inequality on Economic Growth

Abstract

This thesis investigates the global effects of top and bottom inequality on economic growth. Additionally, a new data set is leveraged to consider not only income inequality but wealth inequality, in an effort to examine the common practice of using income instead of wealth distributions. For that purpose, an endogenous growth model in combination with micro- and macro-data constitutes the framework for regressions estimated by system GMM. The analysis shows a predominantly negative effect of overall, top, and bottom inequality for both income and wealth, thereby confirming recent research. While the effects of top and bottom inequality differ in the order of magnitude and significance, wealth inequality shows a stronger negative effect on growth than income. Given the new data set, the common use of income instead of wealth when approximating inequality does not lead to substanitial differences, supporting the use of income instead of wealth. The results have relevant implications for researchers, policymakers, and society as a whole, but should be treated with caution given limited coverage & robustness, difficulties in measuring wealth inequality, and high correlation between GINI coefficient and top inequality.