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On optimal long-term relationship between TFP, institutions, and income inequality under embodied technical progress

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  • Fuentes, Raúl
  • Mishra, Tapas
  • Scavia, Javier
  • Parhi, Mamata

Abstract

We develop a simple optimal catch-up model under embodiment to study the potential long term dynamic relationship between total factor productivity (TFP), institutional quality, and income inequality in the context of a developing economy. Assuming a proactive role of institution in the persistence of TFP and minimum inequality spread for social optimum, we quantify the extent to which embodiment characteristics determine the long-term dynamics among these factors. It is shown that the amelioration (deterioration) of institutional quality influences skilled labour mobility across sectors (in developing economies) thereby decreasing (increasing) long term income inequality. Long run scenarios are built using our model in which the production sophistication of the economy under embodiment is shown to be compatible with both better institutions and less income inequality. Quantile regression results for a sample of 27 developing countries over 1990–2010 provide broad support to the theoretical predictions. In particular, it is found that – along the distribution path of embodied technical progress – there is heterogeneous response of productivity growth to the inequality spread and innovation intensity. Our results have interesting policy implications.

Suggested Citation

  • Fuentes, Raúl & Mishra, Tapas & Scavia, Javier & Parhi, Mamata, 2014. "On optimal long-term relationship between TFP, institutions, and income inequality under embodied technical progress," Structural Change and Economic Dynamics, Elsevier, vol. 31(C), pages 89-100.
    • Handle: RePEc:eee:streco:v:31:y:2014:i:c:p:89-100
    DOI: 10.1016/j.strueco.2014.08.003
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    Cited by:

    1. Giorgio Calcagnini & Germana Giombini & Giuseppe Travaglini, 2021. "The Productivity Gap Among Major European Countries, USA and Japan," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 7(1), pages 59-78, March.
    2. Maria Elisa Farias & Javier Scavia & Raúl Fuentes, 2019. "Bridging the Gaps: Credits, Adoption, and Inequality," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(5), pages 1355-1401, August.
    3. Delphin Kamanda Espoir & Nicholas Ngepah, 2021. "Income distribution and total factor productivity: a cross-country panel cointegration analysis," International Economics and Economic Policy, Springer, vol. 18(4), pages 661-698, October.
    4. Nguyen, Trang T.T., 2016. "Tax administration resources and Income inequality," MPRA Paper 74820, University Library of Munich, Germany.
    5. Wen-Tai Hsu & Lin Lu & Pierre M. Picard, 2023. "Income inequality, productivity, and international trade," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 76(1), pages 203-249, July.
    6. Ni, Niannian & Liu, Yulin & Zhou, Hui, 2022. "Financial openness, capital rents and income inequality," European Journal of Political Economy, Elsevier, vol. 71(C).
    7. Raúl Fuentes Z. & Javier Scavia D. & Juan Berríos P., 2014. "About the long-term distributional impact of embodied technological progress (without spillover effects) in developing countries," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 17(3), pages 28-54, December.
    8. Jinchao Wang & Changfu Luo, 2022. "Social Mobility and Firms’ Total Factor Productivity: Evidence from China," Sustainability, MDPI, vol. 14(22), pages 1-19, November.
    9. Azfar Hilmi Baharudin & Yap Su Fei, 2017. "A Contemporary Re-Examination Of Malaysia’S Economic Growth: The Issues Of Equity, Efficiency And Liberalization," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 62(02), pages 509-530, June.

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