Economic stimulus effects of product innovation under demand stagnation

When confronting economic stagnation, innovation (product innovation in particular) is often cited as an effective stimulus because it is assumed to encourage household consumption and lead to higher demand. Using a secular stagnation model with wealth preference, we examine the effects of product innovation on employment and consumption. This study examines three types of product innovation, including quantity-augmenting-like innovation, addictive innovation, and variety expansion. The first works as if a larger quantity were consumed although the actual quantity remains the same, the second reduces the elasticity of the marginal utility of consumption, and the third increases the variety of consumption commodities. We find that the first and third reduce both consumption and employment, whereas the second expands them. It suggests that policy makers should carefully choose the type of product innovation to promote as an economic stimulus: addictive innovation stimulates business activity whereas quantity-augmenting-like innovation and variety expansion worsen stagnation.