Growth and income distribution in an economy with dynasties and overlapping generations

By building a growth model with two classes-workers and capitalists-this study investigates the existence and stability of the long-run equilibrium along the lines of Pasinetti (Rev Econ Stud 29:267-279, 1962) and Samuelson and Modigliani (Rev Econ Stud 33:269- 301, 1996), and examines the dynamics of income distribution. Unlike preceding studies in which the propensity to save of each class is exogenously given, this study assumes that workers solve a two-period overlapping generations (OLG) model, while capitalists solve an infinite-horizon dynamic optimization model. Depending on the combinations of both classes' time preference rates, parameter of the production function, population growth rate, technological progress rate, and depreciation rate, we obtain two kinds of long-run equilibria: the Pasinetti steady state and the dual steady state as per Samuelson-Modigliani. We show that under realistic values of the parameters, the economy is likely to converge to the Pasinetti steady state. Moreover, by using numerical simulations, we show that a decrease in economic growth rate increases the wealth share of capitalists while decreasing that of workers, and that it increases (decreases) the income share of capitalists while it decreases (increases) that of workers if income share is measured in terms of gross (net) income share.