Inequality and Growth: Why Differential Fertility Matters £ David de la Croix Matthias Doepke FNRS, IRES & CORE UCLA September 2002 Abstract 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 distribution increases the fertility differential between the rich and the poor, which implies that more weight gets placed on families who provide lit- tle education. Consequently, an increase in inequality lowers average education and, therefore, growth. We find that this fertility-differential effect accounts for most of the empirical relationship between inequality and growth. £ We thank Costas Azariadis, Harold Cole, Roger Farmer, Gary Hansen, Lee Ohanian, Martin Schneider, the editor, and two anonymous referees for helpful comments and suggestions. We also benefited from discussions with seminar participants at the Stockholm School of Economics, the SED Meeting in Stockholm, USC, GREQAM, the University of Namur, and the European University Insti- tute. David de la Croix acknowledges financial support from the Belgian French-speaking community (grant ARC 99/04-235) and of the Belgian Federal Government (grant PAI P5/10). Matthias Doepke acknowledges support from the NSF and the UCLA Academic Senate. David de la Croix: National Fund for Scientific Research (Belgium), IRES & CORE, Universit´e catholique de Louvain, Place Mon- tesquieu 3, B-1348 Louvain-la-Neuve, Belgium. E-mail address:
[email protected]. Matthias Doepke: Department of Economics, UCLA, 405 Hilgard Ave, Los Angeles, CA 90095-1477. E-mail address:
[email protected].