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Is inequality harmful for innovation and growth? Price versus market size effects

Author

Listed:
  • Reto Foellmi

    (University of St. Gallen
    CEPR)

  • Josef Zweimüller

    (University of Zurich
    CEPR)

Abstract

We introduce non-homothetic preferences into an R&D based growth model to study how demand forces shape the impact of inequality on innovation and growth. Inequality affects the incentive to innovate via a price effect and a market size effect. When innovators have a large productivity advantage over traditional producers a higher extent of inequality tends to increase innovators’ prices and mark-ups. When this productivity gap is small, however, a redistribution from the rich to the poor increases market sizes and speeds up growth.

Suggested Citation

  • Reto Foellmi & Josef Zweimüller, 2017. "Is inequality harmful for innovation and growth? Price versus market size effects," Journal of Evolutionary Economics, Springer, vol. 27(2), pages 359-378, April.
    • Handle: RePEc:spr:joevec:v:27:y:2017:i:2:d:10.1007_s00191-016-0451-y
    DOI: 10.1007/s00191-016-0451-y
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    3. Alessandro Spiganti, 2020. "Inequality of opportunity, inequality of effort, and innovation," Economics Working Papers MWP 2020/02, European University Institute.
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    7. Kjell Hausken & John F. Moxnes, 2019. "Innovation, Development and National Indices," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 141(3), pages 1165-1188, February.
    8. Bo Qin & Dongmei Zeng & Angang Gao, 2022. "Convergence effect of the Belt and Road Initiative on income disparity: evidence from China," Palgrave Communications, Palgrave Macmillan, vol. 9(1), pages 1-16, December.
    9. Andreas Chai, 2017. "Rethinking the economic possibilities of our grandchildren: what is the future of consumption?," Journal of Evolutionary Economics, Springer, vol. 27(2), pages 215-219, April.
    10. Kiminori Matsuyama, 2009. "Structural Change in an Interdependent World: A Global View of Manufacturing Decline," Journal of the European Economic Association, MIT Press, vol. 7(2-3), pages 478-486, 04-05.
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    More about this item

    Keywords

    Inequality; Growth; Demand composition; Price distortion;
    All these keywords.

    JEL classification:

    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • D30 - Microeconomics - - Distribution - - - General
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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