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Income Distribution and Demand-Induced Innovations

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  • 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.

Suggested Citation

  • Reto Foellmi & Josef Zweimuller, 2006. "Income Distribution and Demand-Induced Innovations," Review of Economic Studies, Oxford University Press, vol. 73(4), pages 941-960.
  • Handle: RePEc:oup:restud:v:73:y:2006:i:4:p:941-960
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    More about this item

    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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