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Is Inequality Harmful for Innovation and Growth? Price versus Market Size Effects

Listed author(s):
  • Foellmi, Reto

    ()

  • Zweimüller, Josef

    ()

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.

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File URL: http://ux-tauri.unisg.ch/RePEc/usg/econwp/EWP-1613.pdf
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Paper provided by University of St. Gallen, School of Economics and Political Science in its series Economics Working Paper Series with number 1613.

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Length: 38 pages
Date of creation: Jul 2016
Handle: RePEc:usg:econwp:2016:13
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