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Income Distribution and Demand-Induced Innovations

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Author Info
RETO FOELLMI
JOSEF ZWEIMÜLLER

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Abstract

We introduce non-homothetic preferences into an innovation-based growth model and study how income and wealth inequality affect economic growth. We identify a (positive) price effect-where increasing inequality allows innovators to charge higher prices and (negative) market-size effects-with higher inequality implying smaller markets for new goods and/or a slower transition of new goods into mass markets. It turns out that price effects dominate market-size effects. We also show that a redistribution from the poor to the rich may be Pareto improving for low levels of inequality. Copyright 2006 The Review of Economic Studies Limited.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-937X.2006.00403.x
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Publisher Info
Article provided by Blackwell Publishing in its journal Review of Economic Studies.

Volume (Year): 73 (2006)
Issue (Month): 4 (October)
Pages: 941-960
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Handle: RePEc:bla:restud:v:73:y:2006:i:4:p:941-960

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