Redistributive Policy and R&D-based Growth

This study examines how redistributive policy attempting to reduce inequality by taxing the bequests of the rich and redistributing the revenue to the poor affects economic growth in an overlapping generations model of R&D-based growth with both product development and process innovation. We show that such a policy simultaneously increases growth and reduces inequality in the long run. When the market structure adjusts, partially reducing inequality in the short run, the effect of redistributive policy on economic growth depends on the values of the social return to variety parameter. However, when the market structure adjusts fully in the long run, the redistributive policy decreases the entry of new firms but raises economic growth and reduces inequality. These favorable predictions of redistributive bequest taxation on growth and inequality are partly consistent with the empirical findings that redistribution is generally benign in terms of economic growth and that lower post-transfer inequality is correlated with faster and more durable growth.