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Income Distribution and Demand-Induced Innovations

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Listed author(s):
  • Reto Foellmi
  • Josef Zweimuller

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, Wiley-Blackwell.

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File URL: http://hdl.handle.net/10.1111/j.1467-937X.2006.00403.x
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Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 73 (2006)
Issue (Month): 4 ()
Pages: 941-960

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Handle: RePEc:oup:restud:v:73:y:2006:i:4:p:941-960
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Find related papers by JEL classification:
  • 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
  • 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

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