Cross-country data support the notion of a Kuznets curve: income inequality tends to increase with income at low levels of income and to decrease with income at higher levels of income. Why? One possible interpretation is as follows: in early stages of development, when investment in physical capital is the main engine of economic growth, inequality spurs growth by directing resources towards those who save and invest the most, whereas in more mature economies human capital accumulation takes the place of physical capital accumulation as the main source of growth, and inequality impedes growth by hurting education because poor people cannot fully finance their education in imperfect credit markets.


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