Growth with Heterogeneous Households

Abstract

One dominant view on the interplay between growth and inequality holds that income inequality promotes saving and therefore promotes development. This opinion is closely related to the view that saving is the engine of growth. Lewis (1954: 156–57) expounds this view as follows:

We are interested not in the people in general, but only say in the 10 percent of them with the largest incomes. … The remaining 90 percent of the people never manage to save a significant fraction of their incomes. … Saving increases relatively to the national income because the incomes of the savers increase relatively to the national income. The central fact of economic development is that the distribution of income is altered in favour of the saving class.