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Is inequality harmful for innovation and growth? Price versus market size effects

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  • Reto Foellmi

    () (University of St. Gallen
    CEPR)

  • Josef Zweimüller

    () (University of Zurich
    CEPR)

Abstract

Abstract We introduce non-homothetic preferences into an R&D based growth model to study how demand forces shape the impact of inequality on innovation and growth. Inequality affects the incentive to innovate via a price effect and a market size effect. When innovators have a large productivity advantage over traditional producers a higher extent of inequality tends to increase innovators’ prices and mark-ups. When this productivity gap is small, however, a redistribution from the rich to the poor increases market sizes and speeds up growth.

Suggested Citation

  • Reto Foellmi & Josef Zweimüller, 2017. "Is inequality harmful for innovation and growth? Price versus market size effects," Journal of Evolutionary Economics, Springer, vol. 27(2), pages 359-378, April.
    • Handle: RePEc:spr:joevec:v:27:y:2017:i:2:d:10.1007_s00191-016-0451-y
    DOI: 10.1007/s00191-016-0451-y
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    Cited by:

    1. Andreas Chai, 2017. "Rethinking the economic possibilities of our grandchildren: what is the future of consumption?," Journal of Evolutionary Economics, Springer, vol. 27(2), pages 215-219, April.

    More about this item

    Keywords

    Inequality; Growth; Demand composition; Price distortion;

    JEL classification:

    • 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
    • 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

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