 Inequality, openness, and growth through creative destructionUlrich Schetter, Maik T. Schneider and Adrian Jäggi Journal of Economic Theory, 2024, vol. 222, issue C Abstract: We examine how inequality and openness interact in shaping the long-run growth prospects of developing countries. To this end, we develop a Schumpeterian growth model with heterogeneous households and non-homothetic preferences for quality. We show that inequality affects growth very differently in an open economy as opposed to a closed economy: If the economy is close to the technological frontier, the positive demand effect of inequality on growth found in closed-economy models may be amplified by international competition. In countries with a larger distance to the technology frontier, however, rich households satisfy their demand for high quality via importing, and the effect of inequality on growth is smaller than in a closed economy and may even be negative. In such case trade gives rise to the endogenous emergence of a ‘dual economy’ where some domestic sectors are highly innovative while others are lagging behind. Keywords: Dual economy; Dutch disease; Economic development; Inequality; Non-homothetic preferences; Small open economy (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:222:y:2024:i:c:s0022053124000930 DOI: 10.1016/j.jet.2024.105887 Access Statistics for this article Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell More articles in Journal of Economic Theory from Elsevier |
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