Recent empirical research on the relationship between income inequality and economic growth has provided controversial results. Some studies predict a negative effect of inequality on growth and some a positive effect. Answers to the controversy have usually been sought in the problems of the estimation technique, the measure of inequality or in some form of non-linearity in the relationship between inequality and growth. This study accounts for these problems by using an improved measure of income distribution and a parametric group-related panel estimation. In conclusion, we find that the effect of inequality is likely to be non-linear. Copyright © 2012 John Wiley & Sons, Ltd.