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26/05/2015 : Alain Desdoigts and Fernando Jaramillo : Mass consumption and bounded learning by doing : Some demand-side implications of income distribution for growth

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Alain Desdoigts and Fernando Jaramillo (Universidad Del Rosario), "Mass
consumption and bounded learning by doing : Some demand-side implications
of income distribution for growth"
Stylized facts relevant to the analysis of economic growth traditionally
focus on the supply-side of the economy. Little reference is made to
mass consumption which has accompanied both industrial revolutions, and
which today is a key feature of economic development in large emerging
countries. This paper provides an endogenous growth model where supply
(structural change) and demand (middle class consumption) interact to
bring out a multi-industry flying-wild-geese development pattern where
each industry may learn from its own experience and/or from others. An
industry learning curve is assumed to evolve over time with cumulative
industry output which in turn depends on the income distribution. To
that end, we relax the assumption of homothetic preferences that
neutralizes demand in the long run. We discuss the implications of
income distribution on an industry learning curve in a set up where a
society of mass consumption may arise as a consequence of horizontal
demand complementarities and technological spillovers across industries.
Eventually, the survival function of the income distribution determines
an industry learning curve. Only a non-degenerate, i.e. neither too
equal nor too unequal, distribution of income yields long-run growth.
There is an inverted-U relationship between inequality and growth. The
rate of growth ultimately depends on the size of the middle class which
creates the conditions for mass consumption, scale economies and
learning by doing as sources of sustained growth.