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Income inequalities and innovation by incumbents

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  • Helene LATZER

    () (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

Abstract

Our paper presents a new rationale for innovation by incumbents. We show that the possibility to price-discriminate between consumers having different levels of wealth is a sufficient incentive for the industry leader to overcome the Arrow (1962) effect and keep investing in R&D, even in the absence of any incumbent advantage in the R&D field. We model an economy composed of two distinct groups of consumers, differing in their wealth endowment and subject to non-homothetic preferences, obtained through unit consumption of the quality good. We demonstrate that in such a framework, there exists a unique steady state equilibrium with positive innovation rates of both incumbents and challengers. Beyond its novelty, this result then also allows us to analyze the effect of the extent of income inequalities on both the challenger and incumbent innovation rates, and by extension on the economic growth rate. We demonstrate that a higher share of the population being poor is detrimental to the rate of economic growth, while a redistribution of wealth from rich to poor consumers increases the challenger innovation rate and has ambiguous effects on the incumbent’s investment in R&D.

Suggested Citation

  • Helene LATZER, 2010. "Income inequalities and innovation by incumbents," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2010002, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  • Handle: RePEc:ctl:louvir:2010002
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    1. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-351, March.
    2. Reto Foellmi & Josef Zweimuller, 2006. "Income Distribution and Demand-Induced Innovations," Review of Economic Studies, Oxford University Press, vol. 73(4), pages 941-960.
    3. Minniti Antonio, 2006. "Multi-product Firms, R&D, and Growth," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(3), pages 1-46, December.
    4. Pablo Fajgelbaum & Gene M. Grossman & Elhanan Helpman, 2011. "Income Distribution, Product Quality, and International Trade," Journal of Political Economy, University of Chicago Press, vol. 119(4), pages 721-765.
    5. Philippe Aghion & Christopher Harris & Peter Howitt & John Vickers, 2001. "Competition, Imitation and Growth with Step-by-Step Innovation," Review of Economic Studies, Oxford University Press, vol. 68(3), pages 467-492.
    6. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters,in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc.
    7. Carsten Eckel & J. Peter Neary, 2010. "Multi-Product Firms and Flexible Manufacturing in the Global Economy," Review of Economic Studies, Oxford University Press, vol. 77(1), pages 188-217.
    8. Pablo D. Fajgelbaum, 2011. "Income Distribution, Product Quality and International Trade," 2011 Meeting Papers 415, Society for Economic Dynamics.
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    10. Piercarlo Zanchettin & Vincenzo Denicolò, 2009. "Leadership Cycles," Discussion Papers in Economics 09/25, Department of Economics, University of Leicester.
    11. Paul S. Segerstrom, 2007. "Intel Economics," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(1), pages 247-280, February.
    12. Zweimuller, Josef, 2000. "Schumpeterian Entrepreneurs Meet Engel's Law: The Impact of Inequality on Innovation-Driven Growth," Journal of Economic Growth, Springer, vol. 5(2), pages 185-206, June.
    13. Avner Shaked & John Sutton, 1982. "Relaxing Price Competition Through Product Differentiation," Review of Economic Studies, Oxford University Press, vol. 49(1), pages 3-13.
    14. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    15. Cozzi Guido, 2007. "The Arrow Effect under Competitive R&D," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-20, January.
    16. Federico Etro, 2004. "Innovation by leaders," Economic Journal, Royal Economic Society, vol. 114(495), pages 281-303, April.
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    1. Price discrimination drives industry leaders to further innovate
      by Economic Logician in Economic Logic on 2010-03-03 20:54:00

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    1. repec:eac:articl:04/15 is not listed on IDEAS
    2. repec:spr:jknowl:v:8:y:2017:i:1:d:10.1007_s13132-016-0363-y is not listed on IDEAS
    3. Sirine Mnif, 2015. "Impact of Inequalities on Technological Changes: Case of the Developing Countries," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 5(3), pages 460-478, March.
    4. Hélène LATZER & Alexandre SIMONS, 2014. "Income distribution, multi-quality firms and patterns of trade," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2014003, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).

    More about this item

    Keywords

    Growth; Innovation; Income inequalities.;

    JEL classification:

    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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