Nonlinear effects of wealth inequality on economic growth: evidence from a semiparametric panel analysis of low-income countries

Growing disparities in asset ownership and capital accumulation have raised concerns about the role of wealth inequality in shaping long-term development, particularly in low-income countries. Although the inequality–growth nexus has been widely studied, most research relies on income-based measures and restrictive parametric models, leading to inconclusive findings. This paper focuses instead on net wealth inequality and applies a two-step semiparametric estimation strategy using panel data for 121 low-income countries from 1995 to 2019. First, we estimate a nonparametric auxiliary regression to construct an adjusted inequality index purged of growth-related endogeneity. Second, we flexibly estimate its impact on economic growth through a semiparametric fixed-effects model. The results reveal a robust inverted U-shaped relationship: moderate inequality stimulates growth, while excessive concentration reduces it. These findings remain consistent across multiple robustness checks and highlight the importance of maintaining inequality within sustainable bounds to support inclusive development.