Income Distribution and Demand-Induced Innovations

Reto Foellmi () and Josef Zweimüller ()

Review of Economic Studies, 2006, vol. 73, issue 4, pages 941-960

Abstract: We introduce non-homothetic preferences into an innovation-based growth model and study how income and wealth inequality affect economic growth. We identify a (positive) price effect-where increasing inequality allows innovators to charge higher prices and (negative) market-size effects-with higher inequality implying smaller markets for new goods and/or a slower transition of new goods into mass markets. It turns out that price effects dominate market-size effects. We also show that a redistribution from the poor to the rich may be Pareto improving for low levels of inequality. Copyright 2006 The Review of Economic Studies Limited.

Date: 2006
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Working Paper: Income Distribution and Demand-Induced Innovations (2005)
Working Paper: Income Distribution and Demand-induced Innovations
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