Beyond the Arrow effect: income distribution and multi-quality firms in a Schumpeterian framework

Hélène Latzer

No 2013004, LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: This paper introduces multi-quality firms within a Schumpeterian framework. Featuring non-homothetic preferences and income disparities in an otherwise standard quality-ladder model, I indeed show that the resulting differences in the willingness to pay for quality among consumers generate both positive investments in R&D by industry leaders and positive market shares for more than one quality, hence allowing for the emergence of multi-product firms within a vertical innovation framework. This positive investment in R&D by incumbents is obtained with complete equal treatment in the R&D field between the incumbent patentholder and the challengers: in our framework, the incentive for a leader to invest in R&D stems from the possibility for an incumbent having innovated twice in a row to efficiently discriminate between rich and poor consumers displaying differences in their willingness to pay for quality. I hence exemplify a so far overlooked demand-driven rationale for innovation by incumbents. I am then also able to analyze the impact of inequality both on long-term growth and on the allocation of R&D activities between challengers and incumbents. I find that redistributive policies generally lead to an increase in the long-run growth rate, and to variations in the share of the overall R&D expenditures being undertaken by incumbents.

Keywords: Growth; Innovation; Income inequality; Multi-Product firms (search for similar items in EconPapers)
JEL-codes: F4 O3 O4 (search for similar items in EconPapers)
Pages: 31
Date: 2013-02-19
New Economics Papers: this item is included in nep-com, nep-cwa and nep-ino
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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