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Is inequality harmful for innovation and growth? Price versus market size effects

Reto Foellmi () and Josef Zweimüller ()

Journal of Evolutionary Economics, 2017, vol. 27, issue 2, 359-378

Abstract: Abstract 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.

Keywords: Inequality; Growth; Demand composition; Price distortion (search for similar items in EconPapers)
JEL-codes: O15 O31 D30 D40 L16 (search for similar items in EconPapers)
Date: 2017
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