Who Gains from Growth: A Dynamic Model of Kuznets' Hypothesis*

This paper uses an overlapping generations model to analyze the relationship between economic development and income distribution and the effect of government taxation and transfers on the distribution of income. Individuals differ in their inherited stocks of human capital and therefore in their productivity and income, and their leisure and investment decisions. Individual productivity depends on inheritance, on investment in education and on society's average productivity. Consequently relative incomes and the distribution of income changes as the level of income changes. Government taxes and redistributes income intertemporally and intratemporally based on decisions made by majority voting. These decisions affect productivity but also produce a welfare class.