De La Croix

American Economic Association
Inequality and Growth: Why Differential Fertility Matters

Author(s): David de la Croix and Matthias Doepke
Source: The American Economic Review, Vol. 93, No. 4 (Sep., 2003), pp. 1091-1113
Published by: American Economic Association
Stable URL: http://www.jstor.org/stable/3132280
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Inequalityand Growth:
WhyDifferentialFertilityMatters
By DAVID DE LA CROIX AND MATrHIAS DOEPKE*
We develop a new theoretical link between inequality and growth. In our model,
fertility and education decisions are interdependent.Poor parents decide to have
many children and invest little in education. A mean-preserving spread in the
income distributionincreases thefertility differentialbetween the rich and the poor,
which implies that more weight gets placed onfamilies whoprovide little education.
Consequently,an increase in inequality lowers average education and, therefore,
growth. Wefind that thisfertility-differentialeffect accountsfor most of the empir-
ical relationship between inequalityand growth. (JEL J13, 040)
How does the income distributionof a coun- which lowers average education. The fertility
try affect its rateof economic growth?We argue differential,in turn, is a function of the income
that to answer this question, it is essential to distribution. If the differential increases with
account for the fertility differentialbetween the inequality,countrieswith higher inequalitywill
rich and the poor. Our argumentis simple: the accumulate less human capital, and therefore
fertility differential matters because it affects grow slower.
the accumulationof human capital. Assuming We develop a growth model which captures
that we identify human capital with education, this channel from inequality to growth. Our
future human capital is a weighted average of model is related to Gerhard Glomm and B.
the education of today's childrenfrom families Ravikumar(1992), who analyze the effects of
in different income groups, with the weights public versus private education on growth in a
given by income-specific fertility rates. Poor model with fixed fertility. We use a similar
parentstend to have many childrenand provide overlapping-generationsframework,but model
little education. If the fertility differential be- endogenousfertility decisions along the lines of
tween the' rich and the poor is large, more Gary S. Becker and Robert J. Barro (1988).
weight is put on children with little education, Both fertility and education are thus chosen
endogenously. Parents face a quality-quantity
trade-off in their decision on children, and we
show that education increases with the income
* de la Croix:NationalFundfor ScientificResearch(Bel- of a family (richer families can afford more
gium), IRES and CORE, UniversiteCatholiquede Louvain, education), while fertility decreases with in-
Place Montesquieu3, B-1348 Louvain-la-Neuve,Belgium (e- come (the time cost of child rearingis high for
mail: delacroix@ires.ucl.ac.be);
Doepke:Departmentof Eco-
nomics, Universityof California,405 HilgardAvenue, Los
rich parents). The aggregate behavior of the
Angeles, CA 90095 (e-mail: doepke@econ.ucla.edu).We model depends on the initial distributionof in-
thank Costas Azariadis, Harold Cole, Roger Farmer,Gary come. Other things being equal, we find that
Hansen,Lee Ohanian,MartinSchneider,and two anonymous economies with a less equitable income distri-
refereesfor helpfulcommentsand suggestions.We also ben-
efitedfromdiscussionswith seminarparticipantsat the Stock-
bution have higher fertility differentials, accu-
holm School of Economics,the SED Meeting in Stockholm, mulateless humancapital,and have a lower rate
USC, GREQAM,the Universityof Namur,and the European of economic growth.A calibratedversion of our
UniversityInstitute.de la Croix acknowledgesfinancialsup- model with endogenous fertility choice shows
portfromthe BelgianFrench-speaking community(GrantNo. that this effect is quantitativelyimportantand
ARC 99/04-235) and the Belgian FederalGovernment(Grant
No. PAI P5/10); Doepke had supportfrom the NationalSci- accounts for most of the empirical relationship
ence Foundation(GrantNo. SES-0217051) and the UCLA between inequality and growth. In contrast, if
AcademicSenate. we impose fertilityto be constantacross income
1091
1092 THEAMERICANECONOMICREVIEW SEPTEMBER2003
groups, the effects of inequalityon humancap- does not allow for long-rungrowth,the analysis
ital and growth are small. concentrateson nonlineardynamics during the
We also analyze the dynamic properties of transition to the steady state. In Oded Galor
the model. Since in our dynastic frameworka and Hyoungsoo Zang (1997), inequalityaffects
period correspondsto one generation, the dy- growththroughits effect on overall fertility and
namics of the model are to be interpretedas human capital. Financial market imperfections
changes which occur over a horizonof a century play a crucial role in their analysis. Olivier F.
or more. Here we find thatthe predictionsof the Morand (1999) has a model of inequality and
model are similar to broadpatternsof develop- fertility in which the sole motive for fertility is
ment observedin industrializingcountriesin the old-age support.He concentrateson the possi-
nineteenthand twentiethcenturies.For realistic bility of poverty traps when the initial level of
parametervalues, the interactionof fertility and humancapital is too low. Ourpaperalso relates
education decisions gives rise to nonmonotone to empirical studies of the growth-inequality
behavior in inequality and fertility: both vari- relationshipsuch as RobertoPerotti(1996) and
ables rise initially, and laterstartto fall. In other Barro (2000). Both Perotti and Barro find that
words, the model generates both a Kuznets demographicvariablesare importantfor under-
curve and a demographic transition. Thus, in standingthe growtheffects of the income distri-
addition to accounting for the cross-sectional bution,but once again differentialfertilityis not
relationshipbetween inequalityand growth, the considereddirectly.
model generates plausible implications for the In the following section, we introduce the
dynamic interactionof inequality, fertility, and model. Section II presentstheoreticalresults on
growth over long time horizons. the quality-quantitytrade-off and the long-run
The relationshipsbetween inequality, differ- dynamics of the model. In Section III we cali-
ential fertility, and growth postulated by the brateand simulatethe model to assess the quan-
model are supportedby empirical results. Mi- titative importance of the differential-fertility
chael Kremerand Daniel Chen (2000) examine channel,and to examine the implicationsfor the
the relationshipbetween inequality and differ- dynamic evolution of inequality, fertility, and
ential fertility. Using cross-country data, they growth.Empiricalevidence is discussed in Sec-
find that more inequalitytends to be associated tion IV, and Section V concludes.
with larger fertility differentialswithin a coun-
try. This supportsthe first part of our hypothe- I. The ModelEconomy
sis, linking inequalityto differentialfertility.To
examine the second part of our hypothesis, the Consider an economy that is populated by
link from differentialfertilityto growth,we add overlappinggenerationsof people who live for
a differential-fertility variable to a standard three periods: childhood, adulthood, and old
growth regression and find large significantef- age. Time is discrete and goes from 0 to oo.All
fects of differential fertility on growth. In the decisions are made in the adult period of life.
same regressions,the direct effect of inequality People care aboutadultconsumptionct, old-age
as measured by Gini coefficients is insignifi- consumption dt + 1, their number of children nt,
cant, once differentialfertility is included. and the human capital of children ht+1. The
The majorityof the existing literatureon in- utility function is given by:
equality and growth concentrates on channels
where inequalityaffects growththroughthe ac- ln(c,) + 13ln(dt+) + y ln(n h, +).
cumulationof physical capital(see RolandBen-
abou, 1996). To our knowledge, Paul G. The parameterf3 > 0 is the psychological dis-
Althaus (1980) is the only existing model that count factor and 7y> 0 is the altruismfactor.
analyzes the effects of differential fertility on The role of old-age consumptionis to provide a
growth. However, in Althaus' model fertility motive for savings and therefore generate an
differentialsare exogenously given, and the role endogenous supply of capital. Notice that par-
of humancapitalis not considered.Endogenous ents care about both the quantity nt and the
fertility differentials arise in Momi Dahan and quality ht + 1 of their children.Raising one child
Daniel Tsiddon (1998), but since their model takes fraction GE(0, 1) of an adult's time. An
VOL 93 NO. 4 DE LA CROIXAND DOEPKE: INEQUALITYAND GROWTH 1093
adulthas to choose a consumptionprofile c, and represents externalities at the community or

d + 1, savings for old age st, numberof children society level. Alternatively, K can be inter-
nt, and schooling time per child et. The budget preted as measuringthe effect of the quality of
constraintfor an adult with humancapital ht is: schooling, since h is the average humancapital
of teachers. The efficiency parameter B, in-
(1) ct + St + etntwtht = wth,(l - rnt), creases deterministicallyat a constant rate:
B, = B(1 + p)(l-
T
where wt is the wage per unit of humancapital. (4) K)t.
We assume that the average human capital of
teachersequals the averagehumancapitalin the The parameterssatisfy B, 0 > 0, and -1 E (0,
populationht, so thateducationcost per child is 1). The presence of 0 guarantees that parents
given by etwtht. The assumption that teachers have the option of not educatingtheir children,
instead of parents provide education is crucial because even with et = 0 futurehuman capital
for generating fertility differentials. It implies remains positive. As in Peter Rangazas (2000),
that the cost of education is fixed and does not equations (3)-(4) are compatible with endoge-
depend on the parent's wage. Education is nous growthfor K = 1 - T,and with exogenous
thereforerelatively expensive for poor parents.1 growth otherwise. We will later explore the
In contrast,since raising each child takes a fixed implications of exogenous versus endogenous
amountof the parent's time, having many chil- growth for the long-run behavior of the
dren is more costly for parents who have high economy.
wages. Parents with high human capital and Productionof the consumption good is car-
high wages thereforesubstitutechild quality for ried out by a single representativefirm which
child quantity and decide to have less children operates the technology:
with more education.
The only friction in the model is that chil- Y = AKaLt-a
dren cannot borrow to finance their own ed-
ucation. Instead, education has to be paid for where Kt is aggregate capital, Lt is aggregate
by the parents. This assumption is made in labor supply, A > 0, and a E (0, 1). Physical
most studies of the joint determination of capital completely depreciates in one period.
fertility and education. In the real world, chil- The firm chooses inputs by maximizing profits
dren generally do not finance their own edu- Yt- wtLt - RtKt.
cation (at least up to the secondary level). Human capital is distributedover the adult
The budgetconstraintfor the old-ageperiodis: population according to the distributionfunc-
tion Ft(ht). Total population Pt evolves over
- time according to:
(2) dt+1 R,+ st.
Rt+ 1 is the interestfactor.The humancapitalof

the children ht+1 depends on human capital (5) Pt+, = Pt nt dFt(h,),
of the parentsht, averagehumancapital ht, and
education et:
and the distributionfunction of human capital,
(3) ht+1 = Bt ( + et)n(ht)T(ht)K. Ft(h) evolves according to:
Here the parameter T E [0, 1] captures the
intergenerationaltransmissionof humancapital Pt -- h)
within the family, whereas K E [0, 1 - T] (6) F+ (h) = Pt+-- n,I(ht+1 dFt(ht).
'
o
1
Alternatively,we could have assumed that educationis Here I(-) is an indicator function, and it is
providedby parents,but thatthe parents'teachingproductivity
increaseswith their own humancapital.In the model devel- understoodthatthe choice variablesnt and ht + 1
oped by OmerMoav (2001) this assumptionleads to poverty are functions of the individualstate ht. Average
trapscharacterizedby high fertilityand low education. human capital ht is given by:
h, faced by individuals. We find that education

(7) h, = h, dF,(h,). increases and fertility decreases with in-
"o come. The size of the differentials depends on
the initial dispersion of human capital. To
The market-clearingconditions for capital and examine the long-run implications of the
labor are: model, we characterize the balanced growth
path. Finally, we examine the dynamics of
individual human capital as a function of the
(8) Kt+1 = P, s, dF,(ht), parameters.
'o
A. The Trade-offBetween the Quality and
Quantityof Children
and:
The key variable for decisions in our econ-
omy is the humancapital ht of a family relative
to the average human capital ht of the popula-
(9) L, = Pt h,(l - n,t) dF,(h,)
tion. We denote the relative human capital of a
-0o
household as:
-
x
etn,h, dF,(h,) .
0
This last conditionreflects the fact that the time For a household that has enough humancapital
devoted to teaching is not available for goods 0
production. We are now ready to define an such that the condition xt > -- holds, there is
equilibriumfor our economy. an interior solution for the optimal education
level, and the first-orderconditions imply:
Definition 1: Given an initial distribution of
human capital Fo(ho), an initial stock of phys-
ical capitalKo, and an initial populationsize Po, (10) St = 1+ 3+ 7 wth,,
an equilibriumconsists of sequences of prices
{wt, Rt}, aggregate quantities {Lt, Kt+1, ht,
Pt + }, distributionsFt + (ht + ), and decision nX, - 0
(11) et =
rules {ct, dt+ , st, nt, et, ht+1} such that: 1- n
1. the households' decision rules ctd,+ 1, St, nt, (1- - q)'yX,

et, ht + maximize utility subjectto the con- (12) n, = ( 0)(1 +^+ )
straints(1), (2), and (3);
2. the firm's choices Lt and Kt maximize The second-orderconditionsfor a maximumare
profits; satisfied. Note that:
3. the prices wt and R, are such that markets
clear, i.e., (8) and (9) hold; ae, Ant
4. the distributionof humancapital evolves ac- and an< 0,
ax, ax,
cording to (6);
5. aggregate variables Pt and h, are given by
(4), (5), and (7). which reflects the well-documented fact that
skilled people invest relativelymore in the qual-
II. TheoreticalResults ity of their children than in their quantity.The
reason is that the cost of education is fixed,
We begin the analysis of the model by while the time cost of raising many children
characterizing the quality-quantity trade-off increases with income.
VOL.93 NO. 4 DE LA CROIXAND DOEPKE: INEQUALITYAND GROWTH 1095
terested in. Assuming that all dynasties choose

positive levels of education, equation (11)
shows that education is a linear function of
relative human capital. If the dispersion of hu-
man capital increases for a given average level
of human capital, this linearity implies that the
average educationchoice will still be the same.
--
However,since the productionfunctionfor human
7(1-7) ........ ........
;o
..............................................
capital is concave in education,future average
0(1+/+?) humancapitalwill be lower if the distributionof
o~~~~~~~~~~~~~~~~~~~~~~~~m
human capital is less equal. This would be true
0 Xt even if fertilitywere constantacrossfamilieswith
differenthumancapitallevels. The fact thatfertil-
FIGURE1. FERTILrrITY AS A FUNCION OF HUMANCAPrrAL ity is actuallyhigherfor people with low human
capital greatly amplifies the negative effect of
The lowest possible fertility rate is given by: inequalityon humancapitalaccumulation.
7(1 - ,) B. The Balanced GrowthPath

lim nt = ( 3 y)
To analyzethe dynamicbehaviorof the econ-
For poorerhouseholdsendowedwith sufficiently omy, it is useful to rewritethe equilibriumcondi-
0 tions in termsof variablesthatare constantin the
little humancapitalsuch thatxt ' -- holds, the balancedgrowthpath.The capital-laborratiok,
optimalchoice for educationet is zero. The first- the growthrate of averagehumancapitalg, the
orderconditionsimply equation(10) and: populationgrowthrateNt andthe deflatedlevel of
averagehumancapitalfit are definedby:
(13) e= 0,
Kt _ht+ l h,t
,y kt=''L , gt = ,-p, + p)'
(14) nt =0(
at- ht' ht -(1
++y)'
+13
We also need to define the distributionof the
Once a householdis at the comer solutionandthe relative human capital levels:
choice for educationis zero, fertility no longer
increasesas the humancapitalendowmentfalls. G,(x,) =-F,(x,h,).
Fertilityas a functionof humancapitalis plot-
ted in Figure 1. The horizontalpart of the rela- Rewriting equations (4), (5), (6), and (7) in
tionshipcorrespondsto the rangeof humancapital terms of the stationaryvariables leads to:
which leads to a choice of zero for educatione.
Fertilitydependsnegativelyon humancapitaland
moves withina finiteinterval.The upperboundon -'
(15) ht=+ + pi
the fertilitydifferentialis given by:
limx,_on, 1
limx,oo,nt 1- (16) N, = nt dGt(x,),
0 o
This relationshipwill turn out to be helpful to
interpret the role of the parameter 7 and to
calibrateits value. 1 X
-
The results derived so far reflect the main (17) G,+ 1(x) = n,I(x,+I <- x) dG,(x,),
effects of inequality on growth that we are in- 'J o
= Given initial conditions ko, ho, and Go(xo),

(18) 1 = xt dGt(x,). an equilibrium can be characterized by se-
'
0
quences {ht+1, gt, nt, G,t+(x), Nt, xt, kt+1}
such that (15), (16), (17), (18), (20), (21), and
Prices follow from the competitive behavior of (23) hold at all dates.
firms, which leads to equalization of marginal This dynamic system is block recursive.
costs and productivities: Given the initial conditions, we can first use
(20) to solve for nt. Then equations (18) and
(19) = A(1 - a)kt (21) determine xt+I and g. Leading (18) by
one period and replacingxt + 1 by its value from
Rt = Aak-1. (21) yields an expression where gt can be com-
puted as a function of past variables,xt and it.
Schooling and fertilitydecisions are given by The new distributionof relative human capital
(13) and (14) for xt < 0/('q4) and by (11) and is given by equation (17). The variable ht+ 1 is
(12) otherwise. The number of children for an obtained from (15), the aggregate population
adult with relative human capital xt is thus growthrateNt from (16), and the futurecapital-
given by: labor ratio kt + 1 from (23). This procedurecan
be used to compute an equilibriumfor any ini-
(20) tial conditions.The futuredistributionof human
capital is always well defined and nonnegative.
n r, (1 - q),x, l Given any initial conditions, an equilibrium
nt =min((xt - 0)(1 + , ) '(1
+ + +3 + 7)J thereforeexists and is unique.
Concerning the long-run behavior of the
From equation(3), the children'shumancapital economy, it follows from these equations that
is given by: there is a balancedgrowthpath in which every-
one has the same human capital.
/
Bx, -~ x,-- -
(21) xt+ - 0 + max 0,
PROPOSITION 1: If rlo > 0, there is a
balanced growth path characterized by
x (h)T+ K- dG(1) = 1 (i.e., the limiting distribution is
degenerate). The growth factor of output and
From equation (9), labor input satisfies: human capital is:
L, 1f+ +
(1 (/)x if K = 1 -T
) dG,(x,)
Io (1 + x (endogenousgrowth),
g*,= , 1-q
1+p otherwise
'o
h, (exogenousgrowth),
J 6/
and the growthfactor of population is:
which leads to:
(1
( )1- y
L, 1+ ((>- 0)(1 + + 7)'
(22) + he
1 1+(
Ptht-
PROOF:
Using (8), (10), (19), and (22), the capitalstock See Appendix A.
evolves accordingto the followinglaw of motion:
Along this balanced growth path, there is no
longer any inequality among households. This
1 holds because we have assumedthathouseholds
(23) k,+ =1 +(23)
13 N A(1
- a)kta.
differ only in theirinitial level of humancapital.
VOL93 NO. 4 DE LA CROIXAND DOEPKE: INEQUALITY
AND GROWTH 1097
If we had introducedability shocks on top of an

unequal initial distribution of human capital,
inequality would persist along the balanced
growth path. We abstract from idiosyncratic
shocks in the presentationof the model, since
they do not play a role in the channel from
inequality to growth that we are interested in. 1
However, shocks can influencethe long-rundy-
namic behavior of the model. Therefore we
introduceability shocks as an extension in Sec-
tion II, subsection C, below.
We will assume 7q > 0 from here on. We
now consider the dynamics of the human cap-
ital of an individual dynasty (of mass zero) T
around an aggregate balanced growth path.
FIGURE2. STEADYSTATESAS A FUNCTIONOF T
This will be useful to understand the role of
the parameter T for the dynamic properties of
the model.
C. The Dynamics of IndividualHuman bally stable. Once T reachesa threshold-T(given

Capital in the Appendix) two additional steady states
appear.The lower one is stable and the second
To study the dynamics of individual human is unstable. This threshold arises at the point
capital, we assume that the economy is on a where the cutoff value for an interiorsolution is
balancedgrowthpath, so that the growthrate of a steady state of the individual dynamics.
average human capital is constant over time: Moreover:
gt = g*. We focus on the effect of the param-
eter T on the dynamics of individual human PROPOSITION2: At the point:
capital. We consider the function x + - xt =
T(xt; r) (the change in relative human capital f = 1- 0
xt as a function of xt and T), which is given by:
the dynamics of individual capital described
(24) by xt+l - xt = T(xt; T) undergo a tran-
scritical bifurcation. There are two steady-
state equilibria, 1 and x, near (1, T) for each
1P(x i) =
( ) value of T smaller or larger than 'T. The equi-
librium 1 (resp. x) is stable (resp. unstable)
for T < T and unstable (resp. stable) for
X x 0+max 0, - -
-x. T > T.
\ 1-1q _
As shown in Appendix B, I(xt; T) is obtained PROOF:
from equation (21) after replacingg* and i by We check the five conditionsthat define such
theirsteady-statevalues. Note thatin the endog- a bifurcation in Stephen Wiggins (1990), p.
enous and exogenous growth cases the function 365:
T(x; T) turns out to be the same.
A detailed study of T(xt; r) is performedin jI(1, f) = 0, 0, f) =
'I((1,
Appendix B. A complete characterizationof the
dynamics of xt as a function of the parameterr
is presentedin the bifurcationdiagramin Figure P
x(1, f) =- (_ ) o,
2. The steady states x are represented on the
vertical axis as a function of T.For small r there
is only one steady state, x = 1, which is glo- "
(lT,)= 1 0.
This bifurcationoccurs when an unstableand nomic growth, and populationgrowth in indus-

a stable fixed point collide and exchange stabil- trialized countries during development. This
ity. That is, the unstable fixed point becomes outcome lends additional support to the rela-
stable and vice versa.2When r increasesbeyond tionship between inequality, fertility, and
T, the high steady state increases and then van- growth postulatedby the model.
ishes once r > qr.Thus, for individualdynamics
to be stable, it is essential that T not be too high. A. Calibration
In the next section, we calibratethe model pa-
rametersto data and find that the stable region We choose the parametersof the model such
for T is the empiricallyrelevantcase. The anal- that the balancedgrowthpath resembles empir-
ysis of the dynamics of xt at given aggregate ical features of the U.S. economy and popula-
conditions is helpful to understandthe numeri- tion. The productionfunction for humancapital
cal simulationscarriedout in the next section. is calibratedto match observed fertility differ-
entials, as well as empirical estimates of the
III. ComputationalExperiments effects of education on future earnings.
The model is calibratedunderthe assumption
The theoreticalresults in the previous section that one period (or generation)has a length of
highlight two channels throughwhich inequal- 30 years. The parametera is the capital sharein
ity affects growthin this model. First,inequality the consumptiongood sector and is set to 1/3 to
in human capital leads to inequality in educa- matchthe empiricalcounterpart.The productiv-
tion, and since the productionfunction for hu- ity level A is a scale parameterand is set to A =
man capital is concave, inequalityin education 1. The discountfactor 13mainly affects the ratio
lowers future average human capital. Second, of human capital to physical capital in the bal-
people with lower human capital not only anced growth path. Since this ratio depends on
choose less educationfor theirchildren,but also the choice of units, it does not provide a con-
a higher number of children. This differential- venient basis for calibrating /3. Given that 13
fertility effect increases the weight in the pop- does not influence qualitative features of the
ulation on families with little education,which model that we are interested in, we choose a
also lowers future human capital. The question value that is standardin the real-business-cycle
arises which effect is more important,and how literature,13= 0.99120 (i.e., 0.99 per quarter).
large the effects are quantitatively.To answer The implied interestrate per year is 4.7 percent.
this question, we calibrateour model and pro- The productivitygrowth rate p governs output
vide numerical simulations of the evolution of growthin the balancedgrowthpath,and is set to
fertility, inequality,humancapital, and income. 1.0230 or 2 percent per year, which approxi-
The main findings are that the effects of in- mates the average growth rate in the United
equality on human capital accumulation and States. With exogenous growth(i.e., K < 1 - r)
growth are sizable, and that the differential- as in our calibration,the overall productivityB
fertility effect is crucial for generating this in the productionfunction for human capital is
result. a scale parameterand is set to B = 1.
We also use the calibratedmodel to analyze The weight y of children in the utility func-
the dynamic implicationsof our theory. Here, a tion governs the growthrateof populationin the
key finding is that for reasonableparameteriza- balancedgrowthpath. In the United States as in
tions, the model generates a "hump shape" in other industrializedcountries, fertility rates are
inequality and population growth which first close to the reproductionlevel. Accordingly,we
increase and then fall duringdevelopment.This choose -ysuch thatthe growthrate of population
feature enables the model to reproducebroad in the balanced growth path is zero. This is
features of the evolution of inequality, eco- achieved by choosing -y = 0.271.3 The time-
3 Since
2
Note that beyond the bifurcationpoint the number of convergenceto the balancedgrowthpathis slow,
fixed points does not change, whereas in a saddle-node the model still allows for substantialpopulationgrowth for
bifurcationtwo fixed points either appearor disappear. long time periods.
VOL.93 NO. 4 AND GROWTH
DE LA CROIXAND DOEPKE: INEQUALITY 1099
cost parameter 4)for having a child determines with respect to educationof 0.6 in the balanced
the overall opportunitycost of children. Evi- growthpath. This numberis within the range of
dence in Robert Haveman and BarbaraWolfe estimates of the elasticity of earnings with re-
(1995) and John Knowles (1999) suggests that spect to schooling. Specifically, estimatesof the
the opportunitycost of a child is equivalent to returnto an additionalyear of schooling range
about 15 percent of the parents' time endow- from 7.5 percentin JoshuaD. Angrist and Alan
ment. This cost only accruesas long as the child B. Krueger (1991) to 12 to 16 percent in the
is living with the parents. If we assume that study of twins by Orley Ashenfelter and
children live with parentsfor 15 years and that Krueger(1994). The surveys by George Psacha-
the adult period lasts for 30 years, the overall ropoulos (1994) and Krueger and Mikael Lin-
time cost should be 50 percent of the time cost dahl (2001) report estimates of the return to
per year with the child present.Accordingly,we schooling in developed countries of 8-10 per-
choose 4)= 0.075. The parameter4)also sets an cent, with higherestimatesfor developing coun-
upper limit on the numberof children a person tries and low levels of schooling. Assuming that
can have. With our choice, a person spendingall an additionalyear of schooling raises education
time on raising children would have a little expenditureby 20 percent, these returnstrans-
above 13 children. A family of two could have late into an earningselasticity of schooling be-
a little under 27 children.4 tween 0.4 and 0.8. The elasticity implied by our
The parameter71 influences the elasticity of parameterchoices is exactly in the middle of
humancapital with respect to education,as well this range.
as the maximum fertility differential in the The remaining parameters K and T do not
economy. Specifically, the maximum differen- influence individual decisions, but still have an
tial written as a ratio is given by 1/(1 - 1). In effect on growthrates.The elasticity Kof future
the data set that we use below, the highest human capital with respect to average human
fertility ratio between women at the lowest and capital h can be calibratedto evidence on the
the highest education levels is 2.74 (Brazil). effects of the quality of schooling. We interpret
This differential is achieved by choosing 71 = the education choice et as the quantity of
0.635. Our choice of 17guaranteesthat realized schooling (correspondingto years of schooling
fertility differentialsin the model never exceed in the data) while h measures the quality of
the maximum differentialobserved in the data, schooling, since it is the average humancapital
which ensures that the role of the differential- of teachers.Comparedto the quantityof school-
fertility channel is not inflated. At the same ing, the quality of schooling (such as spending
time, for evaluating the differential-fertility per pupil at a given level of education)has been
channel it is also importantthat the elasticity of shown to have smaller effects on earningswith
future human capital with respect to education an elasticity of around0.1; see David Cardand
is calibratedrealistically.In the model, this elas- Krueger (1996) and Krueger and Lindahl
ticity is determinedjointly by 17and 0. Since 0 (2001). In line with evidence on the effect of the
enters the education choice of parents,it deter- quality of education, we set K = 0.1. Alterna-
mines aggregateexpenditureson education.We tively, K could also be interpretedas a measure
choose 0 such that in the balanced growth path of human capital externalities. Existing evi-
total educationexpenditureas a fractionof GDP dence [see DaronAcemoglu and Angrist (2001)
matches the correspondingvalue in U.S. data, and Kruegerand Lindahl (2001)] suggests that
which is 7.3 percent.5 The implied parameter these externalities are small as well, i.e., the
value is 0 = 0.0119. Our combined choices for social returnto human capital accumulationis
17and 0 imply an elasticity of human capital only slightly largerthan the privatereturn,con-
firming our low choice of K. Our results are
robust with respect to the choice of this elastic-
4 If we also modeled a
goods cost of having children,the ity in the sense that K matters only for the
upper bound would be lower, and close to the maximum determination of the growth rate of average
human fertility levels observed so far.
5 This figure (Digest of Education Statistics, 1998, U.S. human capital. Individual decisions and the
Departmentof Education)does not include on-the-jobtrain- evolution of inequality,fertility,and differential
ing, since it is not partof the parentalinvestmentin children. fertility are independentof K.
TABLE1-INmrrAL
GROWTH ENDOGENOUS
WITH ANDEXOGENOUS
FERTILITY
Endogenous fertility Exogenous fertility

?2 go No Io Do go No Io Do
0.10 2.00 0.00 0.056 0.09 2.00 0 0.056 0
0.75 1.26 0.66 0.404 1.95 1.87 0 0.400 0
1.00 0.80 1.08 0.520 2.76 1.78 0 0.513 0
1.50 0.01 1.71 0.707 2.77 1.53 0 0.700 0
Notes: o2: Varianceof income distribution.go: Growthrate of humancapitalper worker.No:

Growthrate of population.Io: Income inequality(Gini coefficient). Do: Fertilitydifferential.
The parameterT determinesthe direct effect variance of the underlyingnormal distribution.

of parentalhuman capital (or, equivalently, in- The parameter,u is set such that ht is at its
come) on the children's human capital. Thus, T balanced growth level. We provide simulations
captures the intergenerationaltransmission of for different variances of the distribution in
ability, as well as human capital formation order to examine the effects of inequality. The
within the family that does not work through initial level of physical capital Ko is chosen
formal schooling. Empiricalstudies detect such such that the ratio of physical to human capital
effects, but they are relatively small. Mark R. is equal to its value in the balanced growth
Rosenzweig and KennethI. Wolpin (1994) find path.6
thatan additionalyear of the mother'seducation
at the high school level (roughly a 10-percent B. Initial Inequality,Fertility, and Growth
increasein education)raises a child's test scores
by 2.4 percent. Arleen Leibowitz (1974) finds As a first computationalexperiment, we ex-
that even after controlling for schooling and amine the effect of initial inequalityon growth
educationof the parents,parentalincome has a over the first period. Since a period is in fact a
significant effect on a child's earnings. A 10- generation, the growth rate should be inter-
percent increase in parentalincome increases a preted as a 30-year average. The main findings
child's future earnings by up to 0.85 percent. are that inequality has a sizable effect on
Given that the long-rundynamics of the model growth,and thatmost of this effect is accounted
are sensitive to the choice of T, we choose a for by the endogenous fertility differential.
moderate degree of intergenerationaltransmis- Table 1 presentsthe initial annualizedgrowth
sion of humancapital (T = 0.2) as the baseline rates of humancapital go and populationNo (in
case, and provide a sensitivity analysis with percent), initial inequality I0, and the initial
respect to alternativechoices for r. For individ- fertilitydifferentialDo for differentvariancesof
ual dynamicsto be stable, T must not exceed the the distributionof human capital. Inequalityis
upper bound T from Proposition 2. Given our measuredby the Gini coefficient Io computed
choices for the otherparameters,the upperlimit on the earningsof the working population.Dif-
for r is 0.246, which is well above the calibrated ferential fertility is the difference between the
value. averagefertility of the top quintile and the bot-
In addition to choosing parameters,we also tom quintile;this quantityis then multipliedby
need to set the initial conditions for the simula- two to yield a numberper woman. To evaluate
tions. The overall size of the population is a the role of differentialfertility in our model, we
scale parameterwhich does not affect the re- also computed results under the assumptionof
sults, and is thereforeset to one. Likewise, the constant, exogenous fertility.
distributionof physical capital does not matter, The results in Table 1 show that inequality
since capital is owned by old people who have lowers growth both with and without endoge-
nothing left to decide. We thereforeonly spec-
ify the aggregate value. The initial distribution
of human capital follows a lognormal distribu- 6
The effect of inequalityon growth is independentof jt
tion F(,u, o-2), where ,u and o2 are the mean and and Ko; ,t and Ko only affect average growth rates.
VOL.93 NO. 4 DE LA CROIXAND DOEPKE: INEQUALITY
AND GROWTH 1101
nous fertility, but the effects are much larger Growth

when fertilityis endogenous.When the variance
of the distributionof humancapitalis low (o2 = 0.02
0.10), the difference between endogenous and
exogenous fertility is small, and the growth 0.015
rates are close to their values on the balanced
growth path. When we increase the initial vari- 0.01
ance to -2 = 0.75, substantialfertility differen- \.\
tials within the population begin to arise, and

0.005
the annual growth rate of human capital drops
0.74 percent below the steady state. With con-
stant exogenous fertility, the drop in the growth Gini
0.2 0.4 0.6
rate is six times smaller.Furtherincreasesin the
initial variance eventually lead to a negative 0.005
growth rate (for o2 > 1.5) with endogenous FIGURE
3. THERELATIONSHIPOFINEQUALITYANDGROWTH
fertility, while growth stays positive with exog- wrTH ENDOGENOUS
FERTILITY(SOLIDLINE),EXOGENOUS
enous fertility. FERTILITY
(DASHEDLINES),ANDN BARRO' S REGRESSION
The results are robust with respect to the (DoTED LINES)
choice of T. For example, with or2 = 0.75,
initial growth with endogenous fertility is
1.22 percent for T = 0.05, and 1.32 percent fertility. In a quantitativesense, fertility differ-
for T = 0.3. With exogenous fertility, it is entials within the population are essential for
1.80 percent for T = 0.05, and 1.94 percent generating the relationshipbetween inequality
for T = 0.3. We also carried out the same and growth.
We have also represented the slope of the
computations with a uniform instead of a log-
normal distribution of initial human capital. regressionof economic growthon income Ginis
We still found that growth declines much runby Barro(2000) when the fertility rate vari-
faster with inequality when fertility is endog- able is omitted. In this regression, the Gini
enous. For example, when the Gini index goes coefficient captures the intrinsic effect of in-
from 0 to 0.33, growth drops by 0.7 percent equality as well as the one going through fer-
with endogenous fertility and by 0.1 percent tility. Since actual Gini coefficients lie in the
with exogenous fertility. interval [0.21, 0.64], the regression line has
The initial dispersion of human capital also been restricted to this interval. Our computa-
influencesthe overall growthrate of population. tional experiment is consistent with the Barro
When the variance of human capital rises, fer- (2000) finding: "A reduction of the Gini coef-
tility of low-skilled households increases, while ficient by 0.1 would be estimated to raise the
high-skilled households decide to have fewer growthrate on impactby 0.4 percentper year."7
children. Because of the shape of the fertility Perotti (1996) reportseffects of similar magni-
function (see Figure 1), the first effect domi- tude. Our calibratedmodel is therefore able to
nates and aggregatefertilityrises. This is in line account for most of the empirical relationship
with empiricalstudies thatreporta high positive
correlationbetween aggregatefertilityrates and 7 The comparisonto Barro's result is complicatedby the
Gini coefficients (see Barro, 2000). fact that Barro conditions his estimates on initial GDP,
Figure 3 depicts the growth rate of human whereas in our simulations GDP is partly a function of the
initial income distribution.Thus, in principle, the simula-
capital as a function of the Gini coefficient. The tions pick up the additionaleffect of changing initial GDP.
slope is much steeper with endogenous fertility In practice, however, this effect turns out to be negligible.
than with exogenous fertility. In the data, in- Initial GDP varies only to the extent that child rearingtime
come Ginis for a country vary roughly in the is not includedin GDP, and the resultingdifferencesin GDP
range 0.2 to 0.65. In the model, raising the across inequality levels are small (up to 0.3 percent). We
initial Gini from 0.2 to 0.65 lowers the growth computed results with an additionaladjustmentin average
human capital that holds GDP per worker constant across
rate by only about 0.3 percent with exogenous inequalitylevels. The results are virtuallyindistinguishable
fertility, but by 1.4 percent with endogenous from the ones reportedin Figure 3.
between inequality and growth. Since the em- function for human capital, since for long-run
pirical estimates carry sizable standarderrors, analysis the assumptionthat the only source of
the findingdoes not rule out that other channels inequality is the initial dispersion in human
could also play a role, but clearlythe differential- capital is less attractive. We find that adding
fertility effect appearsto be important. shocks slows growth, but leaves the qualitative
behavior of the model intact. Thus our model
C. The Dynamics of Inequality,Differential turnsout to be successful at accountingfor both
Fertility, and Growth the cross-sectional relationship between in-
equality and growth, and the dynamic interac-
We now turn to the dynamic implications of tion between inequality, fertility, and growth
our model. So far, we have only analyzed the over long time horizons.
effects of inequalityon growthduringthe initial Figure 4 shows the evolution of the growth
period. Since in our dynasticmodel a periodhas rate of human capital, the population growth
a length of 30 years, even the initial growth rate, inequality,and differentialfertility for two
effect extends over a long horizon, and conse- different values of r. Growth rates are annual-
quently the dynamics of the model are to be ized. The initial distributionof humancapital is
interpretedas changes which occur over a ho- assumedlognormalwith o2 = 1, corresponding
rizon of a century or more. We thereforeeval- to an initial Gini coefficient of 0.5. With a low
uate the dynamicbehaviorof the model relative T of 0.05, fertility, inequality, and differential
to the evolution of income, fertility, and in- fertilityconverge monotonicallyto their steady-
equality in industrializingcountries in the last state values. Initially,inequalityreducesgrowth
200 years. A centralfeatureof the data for this below its balancedgrowthvalue for the reasons
period is that the behaviorof populationgrowth explained above, but subsequently the growth
and inequalityis nonmonotone.As a benchmark rate increases. Low initial growth implies that
case, consider England, the first country to in- the capital stock increases more slowly than in
dustrialize.Fertility rates increased until about the balanced growth path. Since productivity
1830 and started to decline rapidly only after growth is exogenous, the effective capital stock
1870 (Jean Claude Chesnais, 1992). Income falls, and the usual transitional dynamics in
inequality followed a similar pattern, with in- exogenous growth models result in higher sub-
creasing inequalityuntil about 1870 and a rapid sequent growth. If T is raised to 0.2, the model
decline afterwards (Jeffrey G. Williamson, generates the hump-shapepatternsthat charac-
1985). The growthrate of income per capita, in terize the data. Fertility and inequalityfirst rise
contrast, does not display a hump shape. and then decrease, and the growth rate remains
Growth rates were essentially zero before the below its balanced growth value for several
industrialrevolution and then increased slowly periods as long as inequality remains high. A
throughoutthe nineteenthcentury(Angus Mad- moderate degree of intergenerationalpersis-
dison, 2001). Similar patternscan be observed tence in human capital is thus essential for
for Western Europe as a whole and, startinga matching the long-run evolution of inequality
little later, in the United States. and fertility to data.
To evaluatehow our model performsrelative The nonmonotonebehaviorof inequalityand
to these facts, we simulate the model with the fertility is related to the comer solution for
baseline calibrationover a horizon of eight pe- education. A fraction of the people in the first
riods, correspondingto 240 years. The main period decides not to invest in education.Since
finding is that for plausible parameters, the this group has the highest fertility rates, their
model can generatea hump shape in inequality childrenmake up an even largerfraction of the
and the populationgrowth rate that looks very populationin the next period. If there is a suf-
similar to the data. This is a surprisingfinding, ficient degree of intergenerationalpersistence,
since unlike most existing theories the model these childrenwill be at the comer solution for
generates the patternwithout requiringany ex- education as well. This leads to an increase in
ogenous change to the economic environment. populationgrowth in the first periods and slow
We also investigatethe behaviorof the model if growth of human capital, since investment in
idiosyncraticshocks are addedto the production education is low. Because of exogenous tech-
g
0.025 N
* .*- .. * =0.05
0.0225 ..^ 0.012
0.02 0.01
l* *.
0.0175 0.008
0.015 0.006
0.0125 0.004
...
0.01 0.002
0.0075 . . . . t 2 3 4 5 6 7 8
2 3 4 5 6 7 8
D
3-
2.5
2-
1.5-
1-
*-
FIGURE4. GROWTH,FERTILITY, AND DIFFERENTIAL

INEQUALITY, FORDIFFERENT
FERTILITY T
nological change and human capital externali- small, i.e., we need some degree of intergen-
ties, however, after a few periods even the erational persistence in human capital and
dynasties that initially did not invest in educa- earnings.8
tion find it optimal to starteducatingtheir chil- The main disparity between the model and
dren. From this point on, inequality and the data is that in the data, growth rates were
population growth fall. slowly increasing throughout the nineteenth
This nonmonotone behavior only occurs if century, whereas the model produces a hump
the initial distribution of human capital is shape with firstrapidlyincreasingand then fall-
such that some people choose not to invest in ing growth rates. This behavior of the model is
education. If everyone is above the threshold generated by transitionaldynamics due to the
initially, convergence to the steady state is exogenous growth assumption. We therefore
monotone even for T = 0.2. For parameters also explore how the model performs if we
that lead to an initial rise in fertility and
inequality, the time paths for inequality,
growth, and fertility look surprisingly similar 8A unique equilibrium exists even if we increase T
to the patterns of development in Western above the bifurcationvalue of i = 0.246, where we enter
Europe between 1800 and 2000 described by the region of the parameterspace in which the dynamics of
Galor and David N. Weil (2000) and others. individualhumancapitalare no longer stable. The returnsto
parental human capital in the education function are not
For example, let us assume that t = 1 in the sufficiently decreasing to compensate the centrifugalforce
graphs corresponds to the period 1760-1790 of the quality-quantitytrade-off. Computationsof the dis-
in England. Then population growth peaks tributionof human capital after a large number of periods
around 1790-1820, and inequality peaks 30 indicate that an ever-decreasing share of the population
accumulatesan ever-increasingshareof humancapital.The
years later. The timing of the subsequent fall mass of people with above-averagehuman capital tends to
is close to what is observed in the data. For zero, but the fraction of human capital accounted for by
the hump to occur, however, T cannot be too them tends to one.
0.025
g
the model by introducingidiosyncratic ability
*
shocks in the production function for human
-
0.02
*
K=1-t
capital. With ability shocks, inequality persists
* K=0.1
even in the long run.
The mainoutcomeof oursimulationswith abil-
0.01
-A - data
ity shocksis thatinequalitydecreasesmoreslowly
0.005 &
t
andgrowthis reduced,which was to be expected,
6 3 47 5 8
2 3 4 5 6 7 8
but that otherwisethe qualitativefeaturesof the
VERSUS
5. EXOGENOUS
FIGURE GROWTH
ENDOGENOUS transitionremainintact.The quantitativeimpact
of abilityshocks is rathersmall as well, provided
thatthe shocksarecalibratedto reproducecurrent
increasethe humancapitalexternalityfrom K = levels of earnings inequality in the United
0.1 to K = 1- T = 0.8 to allow for endogenous States.10Moreover,as can be seen in Figure6, the
growth. As stressed above, individualdecisions differencematerializesonly afterseveralperiods,
and the evolution of inequality, fertility, and since the ability shocks have little additionalim-
differential fertility are independentof the as- pactas long as the distributionof humancapitalis
sumption on K. However, the dynamic pattern widely dispersed.
of the growth rate can be affected.9 Figure In summary,we find that our relatively sim-
5 comparesgrowthratesunderthe two different ple model is surprisinglysuccessful at reproduc-
regimes with U.K. data from Maddison(2001). ing key features of the long-run evolution of
While growth with K = 0.1 increases quickly inequality, fertility, and growth. Under a mod-
and soon exceeds its balanced growth value, erate degree of intergenerationalpersistence in
with K = 1 - r growth converges slowly and human capital (which could be generated by
monotonicallyto its long-runlevel. The pattern persistence in innate ability), the model gener-
under the endogenous growth assumption is ates a hump shape in inequalityand fertility. In
closer to the observedpatternin England,where order to account for slowly increasing growth
the average growth rate of 2 percent was rates of income per capita, it is helpful to intro-
reachedonly towardsthe beginningof the twen- duce an endogenous growth mechanism.While
tieth century.Notice, however, that to generate in our model endogenous growth is generated
endogenous growth we have to assume a much by human capital externalities, we conjecture
higher degree of externalitiesthan suggested by that similarresults could be obtainedwith other
empirical estimates in recent data. The result sources of endogenous growth.
thereforeindicatesthateitherexternalitiesplayed Our results complement existing theories of
a bigger role in the past, or that anotherendoge- long-run growth. Relative to the literature,the
nous growthmechanismwas at work which gen- main novelty is that we link the evolution of
eratedthe slowly increasinggrowthrates. growth and population to the income distri-
So far, we have assumed that the only source bution. In contrast, the models developed by
of inequality is the initial dispersion in human Galor and Weil (2000), Raouf Boucekkine et
capital. As a consequence, inequality is transi- al. (2002), and Gary D. Hansen and Edward
tory in the model and disappearsin the balanced C. Prescott (2002) abstractfrom distributional
growth path. While this abstraction is of no issues.11 We find that allowing for inequality
consequence for the initial growth effects, for
long-run dynamics idiosyncratic shocks would 10The
be expected to be more important.To check the ability shock is multiplicativeand is drawnfrom
robustnessof our results, we thereforeextended a uniform distributionover [0.9, 1.1], which generates a
long-term Gini coefficient of 0.35. We assume that the
ability shock is uncorrelatedwith parental human capital,
since the parameter T already captures intergenerational
9 To calibrate the endogenous growth version of the transmissionof skills.
"
model, we keep T at 0.2 and set K = 0.8. The overall Doepke (2001) has a model of the industrialrevolution
productivityB in the productionfunction for humancapital and the demographictransitionwhich does allow for inequal-
now governs the growth rate of outputper capita. We pick ity. However, since there are only two types of agents, the
B = 0.367 which ensures a long-term growth rate of 2 income distributionhas just two points.A humpin inequality
percent per year. arisesonly if thereare exogenouspolicy changes.
g I
FIGURE
6. GROWTH
ANDINEQUALITY
WITHANDWITHOUT
ABILITY
SHOCKS
in human capital combined with endogenous evidence? The first part of our hypothesis,
fertility and education choice generates real- that income inequality leads to high fertility
istic predictions for inequality, fertility, and differentials, has been analyzed by Kremer
growth in a simple and naturalway. Galor and and Chen (2000). In line with our conjec-
Weil (2000) generate a hump in fertility by ture, they find that Gini coefficients have a
introducing a subsistence level of consump- significant and sizable positive correlation
tion, but the evolution of the income distri- with fertility differentials. In this section we
bution is not explained. In Hansen and examine the second part of our hypothe-
Prescott (2002) fertility is exogenous, so nei- sis, the link from fertility differentials to
ther the hump in fertility nor in inequality are growth. Our approach is to introduce a
accounted for. A limitation of our approachis differential-fertility variable into a standard
that we take the initial conditions at the start growth regression. The analysis is designed to
of the industrial revolution as given. For a full be comparable to recent empirical studies of
account of the evolution of the economy from inequality and growth. As predicted by our
pre-industrial stagnation to modem growth model, we find that differential fertility has a
we would have to add an element to the model negative effect on growth. Moreover, when
that generates the initial stagnation phase. We the differential-fertility variable is present,
suspect that this could be done along the lines the Gini variable is no longer significant in
of Galor and Weil (2000) or Hansen and the regression.
Prescott (2002), but the extension is beyond
the scope of the current paper. A. Data
A main implication of our dynamic analysis
for the inequality-growth relationship is that Our sample contains 68 countries for which
the relationship can be modified by transi- data on fertility differentials is available. The
tional dynamics. Since inequality first in- dependentvariable(GR) in all regressionsis the
creases and then decreases during the average annual growth rate of GDP per capita
transition, inequality does not map one-to-one over the periods 1960 to 1976 or 1976 to 1992
into growth rates. In the empirical analysis, it (the period depends on the availabilityof fertil-
is therefore important to control for transi- ity data).The GDP data is from the Penn World
tional dynamics to isolate the role of the Tables, and growthrates are continuouslycom-
differential-fertility channel. pounded and expressed as percentages.' Since
we are interestedin long-rungrowth, we chose
IV. EmpiricalEvidence
Can the relationships between inequality, 12

For countries where data from 1960 and/or 1992 was
differential fertility, and growth postulated not available, we computed growth rates over the closest
by our model be supported by empirical available interval.
TABLE2-DESCRIPIIVE
STATISTICS
Standard
Sample Observations Variable Mean deviation Minimum Maximum
1960-1976 40 GR 1.95 3.65 -5.75 8.44
GINI 44.32 11.14 23.38 68.00
TFR 5.56 1.89 2.02 7.93
DTFR 2.23 1.56 0.22 5.30
1976-1992 43 GR 0.39 1.89 -3.46 4.97
GINI 45.91 9.56 28.90 69.00
TFR 6.06 1.08 3.37 8.00
DTFR 2.41 0.99 0.10 4.50
Total 83 GR 1.14 2.97 -5.75 8.44
GINI 45.14 10.32 23.38 69.00
TFR 5.82 1.54 2.02 8.00
DTFR 2.32 1.29 0.10 5.30
Notes: GR: Annualized growth rate of income per capita in percent. GINI: Initial income
inequality.TFR:Total fertilityrate.DTFR:Fertilitydifferentials.Detaileddefinitionsanddata
sources are in the main text.
the longest subsample periods available in the countries (AFR), and the initial total fertility
Penn World Tables. rate (TFR). I/GDP and G/GDP are from the
Following Kremer and Chen (2000), for Penn World Tables, the income Ginis are from
fertility differentials we rely on information Klaus Deininger and Lyn Squire (1996), and
from the World Fertility Survey and the De- total fertilityrates and life expectancy (which is
mographic and Health Surveys on total fertil- used as an instrument)are from the Barro-Lee
ity rates by women's educational attainment data set.13The inclusion of initial GDP and the
[see Elise F. Jones (1982); United Nations investmentratio is importantto controlfor tran-
(1987, 1995); Gora Mboup and Tulshi Saha sitional dynamics.
(1998)]. For countries that participated in the One shortcoming of the data set is that the
World Fertility Survey, the independent vari- observations on fertility differentials are close
able is growth in GDP per capita in the first to the end of the period over which we compute
period, and for countries that participated in growthrates. Since the fertilityobservationsare
the Demographic and Health Surveys the left- five-yearaveragesandresultfrom decisions and
hand-side variable is growth over the second actions taken even earlier, the endogeneity
period. Our differential fertility variable problem is not too severe. We correct for po-
DTFR is the difference in the total fertility tential endogeneity of the differentialsby using
rate between women with the highest and the instrumentalvariables.
lowest education level. For some countries we Table 2 provides descriptive statistics for
have two observations from the Demographic the main variables in our analysis. The two
and Health Surveys, in which case we aver- subsamples are similar, except that the aver-
aged the two resulting values. For 25 coun- age growth rate is much lower in the second
tries we have only observations for the first sample. Since we will allow for different con-
period, for 28 countries we have only obser-
vations for the second period, and for 15 13
Where possible, the Gini coefficients are from the
countries there are observations from both initial year; otherwise we used the closest available year.
periods. For a few countries, no data is available in Deininger and
The remainingindependentvariablesare ini- Squire (1996). For Benin, Burundi, Central Africa, and
tial GDP per capita (GDP), the average ratio of Namibia,we relied on the EconomicReporton Africa 1999:
investment to GDP (I/GDP), the average ratio The Challenges of Poverty Reduction and Sustainability,
United Nations (2000). For Haiti and Syria, only land Ginis
of government expenditure to GDP (G/GDP), from IdrissJazairyet al. (1992) are available.We regressed
the initial Gini coefficient for the income distri- the available income Ginis on the land Ginis (correlation:
bution (GINI), a dummy variable for African 0.61) and used the predictedvalues.
TABLE3-GENERALIZEDMETHODOF MOMENTSESTIMATION
Regression
Independent
variable (1) (2) (3) (4)
ConstantA 12.35** (1.31) 12.79** (1.33) 15.30** (1.46) 13.92** (1.69)
ConstantB 10.41** (1.36) 10.98** (1.38) 13.40** (1.45) 12.18** (1.63)
ln(GDP) -1.33** (0.17) -1.21** (0.16) -1.37** (0.15) -1.55** (0.20)
I/GDP 0.14** (0.02) 0.13** (0.02) 0.07** (0.03) 0.08** (0.04)
G/GDP -0.08** (0.03) -0.07** (0.03) -0.05* (0.03) -0.05* (0.03)
AFR -1.75** (0.35) - 1.80** (0.35) - 1.95** (0.32) -2.41** (0.44)
GINI -0.03** (0.01) 0.02 (0.03) 0.06 (0.05)
ln(TFR) -1.84** (0.87) -1.01 (1.01)
ln(DTFR) - 1.22** (0.50)
J-test 17.71 [0.48] 17.11 [0.45] 16.79 [0.40] 9.58 [0.85]
LRI 5.53 [0.01]
LR2 2.08 [0.35]
Notes: The variablesare describedin more detail in the text. The dependentvariableis the growthrate of real per capitaGDP.
Estimationby GMM. The instrumentsare:constant,log of initial GDP per capita,log of initial GDP per capitasquared,initial
investment/GDPratio, initial governmentspending/GDPratio, initial fertility, initial fertility squared,initial life expectancy,
initial life expectancy squared,Africa dummy, and the tropics and access to the sea variablesof Jeffrey Sachs and Andrew
Warner(1997). Heteroskedasticity-consistentstandarderrorsare reportedin parentheses.J-test is the test for overidentifying
restrictionsof Lars P. Hansen (1982), asymptoticallyX2 distributedwith n degrees of freedom, where n is the number of
overidentifying restrictions. Correspondingp-values are reportedin brackets. LR, is a quasi-likelihood ratio test for the
absence of the differentialfertilityin the equation.LR2 is the test for the absence of both Gini and total fertility.The statistics
are computed as the normalized difference between the constrainedand the unconstrainedobjective function, where the
weighting matrix is provided by the unconstrainedestimation (see Donald Gallant, 1987). The correspondingp-values are
reportedin brackets.
* Significant at the 10-percentlevel.
** Significant at the 5-percent level.
stant terms in the two subsamples, this differ- reproduces standardresults in the growth re-
ence will not play a role in the results. These gression literature:the investment rate has a
will thus reflect cross-sectional differences positive effect, whereas the government share,
among countries, as well as variation over initial GDP, and the African dummy have neg-
time within countries. ative effects on growth.Regression (2) adds the
Gini coefficient. The estimated coefficient is
B. EstimationResults significantly negative, and its value is close to
Barro's estimate. The value of the parameter
Table 3 contains our estimationresults. In all implies that an increase in the Gini of 0.4
cases, the left-hand-sidevariable is the average (roughly the range of variation in the data)
growth rate of GDP per capita. The regression lowers growth by about 1.2 percent per year.
equation is estimated with the Generalized However, when the total fertility rate is in-
Method of Moments (GMM). For countriesthat cluded [regression (3)], the coefficient on the
are presentin both sample periods,we allow the Gini coefficient changes sign and becomes in-
error term to be correlatedacross the periods, significant, which is also in line with Barro
and we use instrumentalvariablesto correctfor (2000).
possible endogeneity of I/GDP, G/GDP, GINI, Regression(4) includesthe differential-fertility
and DTFR. We allow the constant to differ variable.The coefficient on differentialfertility
across the periods (Constant A for the early is significantlynegative. The point estimate im-
period and ConstantB for the late period). Our plies that an increase in the fertility differential
regressions are designed to be comparable to from one to two would lower growth by 0.8
Barro (2000), but we include fewer variable percent per year. With differential fertility in-
because of the small sample size. Regression (1) cluded, the coefficients on both Gini and TFR
4-GMM ESTIMATION
TABLE GDP ANDCROSSEFFECTS
wrTHSQUARED
Regression
Independent
variable (1) (2) (3) (4)
ConstantA 9.88 (10.1) -6.70 (17.5) -3.31 (18.8) 6.72 (19.9)
ConstantB 7.95 (10.1) -8.48 (17.4) -4.77 (18.6) 479 (19.7)
ln(GDP) -0.65 (2.73) 4.65 (4.12) 2.37 (4.09) 1.39 (4.26)
ln(GDP)2 -0.04 (0.18) -0.40 (0.24) -0.15 (0.20) -0.26 (0.22)
I/GDP 0.14** (0.02) 0.10** (0.02) 0.07* (0.04) 0.08** (0.04)
G/GDP -0.08** (0.03) -0.08** (0.03) -0.07** (0.04) -0.07** (0.03)
AFR -1.73** (0.36) -1.64** (0.46) -2.23** (0.43) -2.10** (0.52)
GINI -0.13 (0.22) 0.31 (0.27) -0.18 (0.37)
ln(GDP)*GINI/100 -0.01 (0.03) -0.04 (0.04) 0.03 (0.05)
In(TFR) -2.20* (1.13) 0.14 (1.51)
ln(DTFR) - 1.56** (0.68)
J-test 17.63 [0.41] 13.87 [0.54] 16.58 [0.28] 8.38 [0.82]
LRl 5.54 [0.02]
LR2 0.52 [0.77]
Notes: The variablesare describedin more detail in the text. The dependentvariableis the growthrate of real per capitaGDP.
Estimationby GMM. Instrumentsand test statistics as in Table 3. Heteroskedasticity-consistentstandarderrorsare reported
in parentheses.
* Significantat the 10-percentlevel.
** Significantat the 5-percent level.
are insignificant,and the point estimate on the Moreover, there is a large improvement in the
Gini is positive. value of the test when differential fertility is
Based on the results in Section III, our model introduced. The significance of the differen-
predictsthat Gini, total fertility, and differential tial fertility variable is verified both by its
fertility should all be equally negatively related t-statistic and by the quasi-likelihood ratio
to growth. It is therefore not clear why the test LR . The test LR2 of joint insignificance
coefficients on the Gini and the total fertility of GINI and TFR is not rejected.
rate become insignificantonce differentialfer- Barro (2000) argues that there are important
tility is introduced.One possibility is that in- nonlineareffects that relate the levels of devel-
equality and total fertility are influenced by opment and inequality to growth rates. He
other factors which do not affect growth, while shows that unless these nonlinear effects are
differentialfertility is observed with less noise. addressed,the effects of inequality and fertility
A second possibility is that total fertility and on growth are difficult to distinguish.To check
inequality have other effects on growth, which whetherour findings are robust with respect to
are not present in our model and do not work the inclusion of nonlinear terms, we add a
through differential fertility. If some of these squaredterm for GDP per capita and an inter-
effects on growth are positive and therefore action terminvolving GDP and inequalityto the
offset the negative effects, it would be plausible explanatoryvariables. Table 4 presents the re-
that the overall effect of total fertility and the sults. The new terms are never significant and
Gini becomes insignificantonce the differential- do not affect the significance of the J-tests.
fertility channel is controlled for. Given our relatively small number of observa-
Hansen's J-test measures how close the tions, the inclusion of additionalvariables low-
residuals are to being orthogonal to the in- ers the significance of the other variables. In
strument set. It can be seen as a global spec- particular, the Gini coefficient is now never
ification test. The degrees of freedom equal significant, but total fertility is significant in
the number of restrictions imposed by the regression (3). Our main conclusion remains:
orthogonality conditions. These restrictions when differentialfertility is added in regression
are never rejected at the 5-percent level. (4), it is significant, while total fertility is not.
Differentialfertility again improvesthe value of counting for the cross-sectionalrelationshipbe-

the J-test.14 tween inequality and growth.
In summary, we find that standard growth We also examine the time-series implications
regressions detect the effect of differential of our model for the joint evolution of inequal-
fertility on growth postulated by our model. ity, fertility, and growth. Since in our overlap-
The effects implied by the regressions are ping generations model a period is one
sizable. At the same time, including differen- generation,the dynamics of the model are to be
tial fertility leaves the direct effect of the Gini interpretedas changes which occur over a ho-
coefficient insignificant, with a positive point rizon of a centuryor more. Here we find thatthe
estimate. model is able to explain key features of the
evolution of income, fertility, and inequalityin
V. Conclusion industrializingcountries in the last 200 years.
Specifically, the model generates an initial in-
Most of the theoreticalliteratureon inequal- crease and ultimate decline in inequality and
ity and growth has concentrated on channels fertility. The same patternhas been observed in
where inequalityaffects growththroughthe ac- many industrializingcountriesin the nineteenth
cumulationof physical capital. In this paperwe and early twentiethcenturies.In addition,if we
propose a different mechanism which links in- specify the model to allow for endogenous
equalityand growththroughdifferentialfertility growth, the model generatessteadily increasing
and the accumulationof human capital. In our growth rates throughoutthe transition,which is
model, families with less human capital decide anotherstylized feature of the data.
to have more children and invest less in educa- Our analysis provides a new perspective on
tion. When income inequality is high, large the link between economic growth and popula-
fertility differentials lower the growth rate of tion growth. Existing studies have found little
average humancapital, since poor families who correlationbetween the growth rates of popula-
invest little in education make up a large fraction and outputper capita (see Allen C. Kelley
tion of the populationin the next generation.A and Robert M. Schmidt, 1999), which has led
calibrationexercise shows thatthese effects can some researchers to conclude that population
be fairly large. In the benchmarkcase, raising does not matterfor growth. The results in this
the Gini from 0.2 to 0.65 lowers the initial paper suggest that it is not overall population
annual growth rate by 1.4 percent. We also growth, but the distributionof fertility within
examine the role of differential fertility in the the population which is important. In other
growth-regressionframeworkused, among oth- words, who is having the childrenmattersmore
ers, by Perotti (1996) and Barro (2000). In line than how many children there are overall.
with the predictions of the theory, we find siz- A naturaldirection for furtherresearch con-
able negative effects of differentialfertility on cerns the policy implications of our model.
growth.Both the empiricalresults and the quan- Since differentialfertility ratherthan inequality
titative analysis of the model suggest that the per se is the main source of growth effects, it is
differential-fertilitychannel is importantfor ac- not clear that redistributionalpolicies would
increase economic growth. Indeed, a typical
outcome in models with endogenous fertility is
14
As an additionaltest of the robustnessof our results,
that income redistributiontends to increase fer-
we also carriedout regressions with initial life expectancy tility differentials (see Knowles, 1999), which
as an explanatory variable. Growth regressions generally would lower the growth rate. Here the policy
show life expectancy to be more closely related to growth implications of our model are in stark contrast
than other demographicvariables such as the total fertility to other theories linking inequality and growth.
rate. However, even if we add life expectancy to regression
(4) in Table 3, differential fertility continues to have a Compared to income redistribution, policies
significantly negative effect on growth, albeit with a lower aimed at equalizing access to education would
point estimate of -0.79. be more effective.
1110 THEAMERICAN REVIEW
ECONOMIC SEPTEMBER
2003
1
APPENDIXA: PROOFOF PROPOSITION
Case K = 1 - T: The constant values gt = B(r(o - 0)/(1 - q))Y,Nt = nt = N*, xt1 =

xt = 1, and:
3
(AP3(1+ + y)(1- a)(4- 0)1-711/(1-a)
=
kt+1= kt ^(i+ a-T_)1 J
solve equations (16), (17), (18), (20), (21), and (23).
Case K + 1 - T: The constant values gt = 1 + p, Nt = nt = *,+ = 1,

(K T)
/B f^ -)
l+p I 1 1- )
and:
- (
X3(+ 0)(1 + + y)A(l - a)1(1
(
k- -a)
kt+l kt (1 + 3)(1 + p)(1 - )y /
solve equations (16), (17), (18), (20), (21), and (23).
APPENDIXB: ANALYSISOF THEINDIVIDUALTRANSITIONFUNCTION
In orderto understandthe dynamics of the model, we examine the function xt - xt = ~(xt;

T), i.e., the change in xt as a function of xt and r:
BxT I ( r]4x- 'I

K
(x; T) =-g* 0+max 0, 1X (*)+ -x.
Here g* and /* are the balanced growth path values. In the case K = 1 -T we replace g* by
B(q(o - 0)/(1 - 1))T. In the case K 0 1 - r, we replace g* by 1 + p and I* by {[BI(l +
p)][q(p _- 0)/(1 - q)]}1/(1 -K--T). Both substitutions lead to the same expression, i.e., equation
(24) of the main text. The expression can be rewrittenas:
-
0(1 - 7) 0qx-0-'l
I(x; T) = Xt () 0) + max 0 (- 0)) -
We first consider the limits of this function. We have: AP(0;T) = 0 and P'(0; T) = + oo, and:
lim P(x; T) =
XT+ - X,
' c- O-
x--
which implies:
lim T(x; r) = -oo if T + q < 1 and lim P(x; T) = +00 otherwise.

x --->X x --
Hence the function T starts from (0, 0) with an infinite slope and goes either to -oo or +00
depending on parametervalues.
By definition of the aggregatebalanced growth path, x = 1 is a steady state and thus T(1; T) =
0. This steady state is locally stable if and only if x'(1; T) < 0, i.e.,
71
T+ --0 o 1 <0.
At the point:
T= 1-
the dynamics of individual capital described by: xt+ - xt = (xt; ) undergo a transcritical
bifurcation,as proved in Proposition2. There are thus two steady-stateequilibria, 1 and x, near (1,
iT)for each value of T smaller or larger than T. The equilibrium1 (resp. x) is stable (resp. unstable)
'
for r < and unstable (resp. stable) for T > T.
Another point of interest is xt = ?; If, at this point, the function T is negative, it crosses
the horizontalaxes between 0 and 0. The existence of this steady stateresultsfrom the infiniteslope
of T at 0 and from its continuity;uniquenessresultsfrom the concavity of the functionin the interval
(0, --). We evaluate:
P 7 T,) = (2 -))( ) -7
This is negative if T is above a thresholdir
(1 - T)ln(0/7) - In t- ln((l - *)/(( - 0))

= In 0 - ln(mrP)
We are now able to fully characterizethe dynamics of x as a function of the parameterT. The
bifurcationdiagramis presentedin Figure 2.
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American Economic Association

Inequality and Growth: Why Differential Fertility Matters

By DAVID DE LA CROIX AND MATrHIAS DOEPKE*

adulthas to choose a consumptionprofile c, and represents externalities at the community or

Rt+ 1 is the interestfactor.The humancapitalof

h, faced by individuals. We find that education

1. the households' decision rules ctd,+ 1, St, nt, (1- - q)'yX,

terested in. Assuming that all dynasties choose

7(1 - ,) B. The Balanced GrowthPath

= Given initial conditions ko, ho, and Go(xo),

If we had introducedability shocks on top of an

C. The Dynamics of IndividualHuman bally stable. Once T reachesa threshold-T(given

This bifurcationoccurs when an unstableand nomic growth, and populationgrowth in indus-

Endogenous fertility Exogenous fertility

Notes: o2: Varianceof income distribution.go: Growthrate of humancapitalper worker.No:

The parameterT determinesthe direct effect variance of the underlyingnormal distribution.

nous fertility, but the effects are much larger Growth

tials within the population begin to arise, and

FIGURE4. GROWTH,FERTILITY, AND DIFFERENTIAL

Can the relationships between inequality, 12

Differentialfertility again improvesthe value of counting for the cross-sectionalrelationshipbe-

Case K = 1 - T: The constant values gt = B(r(o - 0)/(1 - q))Y,Nt = nt = N*, xt1 =

solve equations (16), (17), (18), (20), (21), and (23).

Case K + 1 - T: The constant values gt = 1 + p, Nt = nt = *,+ = 1,

kt+l kt (1 + 3)(1 + p)(1 - )y /

solve equations (16), (17), (18), (20), (21), and (23).

APPENDIXB: ANALYSISOF THEINDIVIDUALTRANSITIONFUNCTION

In orderto understandthe dynamics of the model, we examine the function xt - xt = ~(xt;

BxT I ( r]4x- 'I

lim T(x; r) = -oo if T + q < 1 and lim P(x; T) = +00 otherwise.

This is negative if T is above a thresholdir

(1 - T)ln(0/7) - In t- ln((l - *)/(( - 0))

REFERENCES from a New Sample of Twins." American

velopment,September1994,22(9), pp. 1325- United Nations. Fertility behaviour in the con-

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