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A Schumpeterian model of growth and inequality

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  • Hélène Latzer

Abstract

This paper contributes to the analysis of the effects of demand structure on longterm growth. Introducing non-homothetic preferences in an otherwise standard quality- model, we first show that disparities in purchasing power generate positive R&D investment by quality leaders. This result is obtained with complete equal treatment in the R&D field between the incumbent patentholder and the challengers as well as without any concavity in the R&D cost function: in our framework, the incentive for a leader to invest in R&D stems from the possibility for an incumbent having innovated twice in a row to efficiently discriminate between rich and poor consumers displaying differences in their willingness to pay for quality. We hence exemplify a so far overlooked demand-driven rationale for innovation by incumbents. We then move to analyzing the impact of inequalities on long-term growth in our quality-ladder framework, and find that a lower level of wealth disparities always leads to an increase in the long-run growth rate. Finally, we show that beyond this negative impact on growth, inequalities also influence the allocation of the overall R&D effort between incumbents and challengers: a higher level of inequalities will in most cases lead to a bigger share of the overall R&D investment to be carried out by quality leaders.

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Paper provided by Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg in its series Working Papers of BETA with number 2011-20.

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Date of creation: 2011
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Handle: RePEc:ulp:sbbeta:2011-20

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Keywords: Growth; Innovation; Income inequalities.;

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  1. Minniti, Antonio, 2006. "Multi-Product Firms, R&D, and Growth," MPRA Paper 2097, University Library of Munich, Germany.
  2. Federico Etro, 2004. "Innovation by leaders," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 114(495), pages 281-303, 04.
  3. Piercarlo Zanchettin & Vincenzo Denicolò, 2009. "Leadership Cycles," Discussion Papers in Economics, Department of Economics, University of Leicester 09/25, Department of Economics, University of Leicester.
  4. Peter Neary & Carsten Eckel, 2006. "Multi-Product Firms and Flexible Manufacturing in the Global Economy," Economics Series Working Papers, University of Oxford, Department of Economics 292, University of Oxford, Department of Economics.
  5. Pablo D. Fajgelbaum, 2011. "Income Distribution, Product Quality and International Trade," 2011 Meeting Papers, Society for Economic Dynamics 415, Society for Economic Dynamics.
  6. Zweimüller, Josef, 1998. "Schumpeterian Entrepreneurs Meet Engel's Law: The Impact of Inequality on Innovation-Driven Growth," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1880, C.E.P.R. Discussion Papers.
  7. Foellmi, Reto & Zweimüller, Josef, 2005. "Income Distribution and Demand-Induced Innovations," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4985, C.E.P.R. Discussion Papers.
  8. Segerstrom, Paul S., 1999. "Intel Economics," Working Paper Series, Research Institute of Industrial Economics 524, Research Institute of Industrial Economics.
  9. Cozzi Guido, 2007. "The Arrow Effect under Competitive R&D," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 7(1), pages 1-20, January.
  10. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  11. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  12. Pablo D. Fajgelbaum & Gene M. Grossman & Elhanan Helpman, 2009. "Income Distribution, Product Quality, and International Trade," NBER Working Papers 15329, National Bureau of Economic Research, Inc.
  13. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, National Bureau of Economic Research, Inc, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc.
  14. Robert J. Barro & Xavier Sala-i-Martin, 2003. "Economic Growth, 2nd Edition," MIT Press Books, The MIT Press, The MIT Press, edition 2, volume 1, number 0262025531, December.
  15. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, Elsevier, vol. 18(2), pages 301-317, August.
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  1. Price discrimination drives industry leaders to further innovate
    by Economic Logician in Economic Logic on 2010-03-03 14:54:00
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Cited by:
  1. Hélène LATZER & Alexandre SIMONS, 2014. "Income distribution, multi-quality firms and patterns of trade," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales), Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) 2014003, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).

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