Social Conflict and Growth

by JESS BENHABIB ,ALDO RUSTICHINI

Despite the predictions of the neoclassical theory of economic growth, we observe that poor countries have invested at lower rates and have not grown faster than rich countries. To explain these empirical regularities we provide a game-theoretic model of conflict between social groups over the distribution of income. Among all possible equilibria, we concentrate on those that are on the constrained Pareto frontier. We study how the level of wealth and the degree of inequality affects growth. We show how lower wealth can lead to lower growth and even to stagnation when the incentives to domestic accumulation are weakened by redistributive considerations.