Heterogeneous Agents, Distribution and Growth

We modify the Uzawa-Lucas representative agent model of endogenous economic growth to allow for a variety of differences among households: differences in their tastes, in their human capital production technologies, and in their initial endowments. Some differences are incompatible with the existence of a steady- state equilibrium, while others have no effect upon the steady-state growth rate. However, a variety of differences give rise to inequalities in the distribution of income and to variations in the steady-state rate of growth. Furthermore, a redistributive tax and transfer policy can have a significant impact upon the steady-state level of investment in human capital and, thus, upon the rate of economic growth.