Class Struggle in a Schumpeterian Economy

This study explores the conflict of interests between workers and capitalists in a Schumpeterian economy. We consider the limit on the market power of monopolistic firms as a policy instrument and derive its optimal levels for workers and capitalists, respectively. Because monopolistic profit provides incentives for innovation, workers may prefer monopolistic firms to have some market power, but they prefer less powerful monopolistic firms than capitalists. Workers' preferred level of monopolistic power is decreasing in their discount rate and increasing in innovation productivity and the quality step size. Capitalists' preferred level of monopolistic power is increasing in the quality step size. We use the difference in levels preferred by workers and capitalists to measure the severity of their conflict of interests, which becomes less severe when workers' discount rate falls or innovation productivity rises. Finally, at a small (large) quality step size, enlarging the step size mitigates (worsens) their conflict.