2019-02-14

 

A Model of Industrialization and Rural Income Distribution

Yong Wang

February 4, 2019

 

Abstract

We develop a simple dynamic general equilibrium model to analytically characterize how (de) industrialization interacts with rural income distribution and also explore the implications for aggregate GDP growth, the evolution of rural income distribution as well as welfare. The model features a novel non-homothetic utility function that greatly improves model tractability. Redistributive policies are shown to sometimes enhance GDP and welfare by (1) boosting the production of the goods with high desirability (or productivity) but constrained by depressed demand due to income inequality, and (2) internalizing the dynamic impact of private production and consumption decisions on future public productivities.

 

Key Words: Structural Change, Income Distribution, Non-homothetic Preference, Human Capital, Economic Growth