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Innovation, Inequality and a Golden Rule for Growth in an Economy with Cobb-Douglas Function and an R&D Sector

Paul Welfens ()

No 8996, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: The innovative approach presented introduces a modified neoclassical growth model which includes a new bias of technological progress in a quasi-endogenous growth model in which part of labor is used in the research & development sector. The combination of a macroeconomic production function and a new progress function, plus the assumption that the output elasticity of capital is positively influenced by the size of the R&D sector, sheds new light on innovation and growth as well as income inequality: Thus there is a new approach for explaining Piketty's historical findings of a medium term rise of the capital income share in industrialized countries – both in the earlier and later part of the 19th century and in 1990-2010. A rising share of capital income can be explained within this approach by the increase in the output elasticity of capital, which has been developed in a new way, namely in the context of R&D. In the approach presented herein, the golden rule issues are also highlighted and it is shown that choosing the right size of the R&D sector will bring about maximum sustainable per capita consumption. While the basic new model is presented for the case of a closed economy, one could easily accommodate both trade and foreign direct investment and thereby get a better understanding of complex international investment, trade and FDI dynamics – including with respect to the envisaged Transatlantic Trade and Investment Partnership.

Keywords: innovation; growth; inequality; golden rule; Piketty (search for similar items in EconPapers)
JEL-codes: O11 O32 O40 D63 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2015-04
New Economics Papers: this item is included in nep-cse, nep-gro and nep-ino
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Journal Article: Innovation, inequality and a golden rule for growth in an economy with Cobb-Douglas function and an R&D sector (2015) Downloads
Working Paper: Innovation, Inequality and a Golden Rule for Growth in an Economy with Cobb-Douglas Function and an R&D Sector (2015) Downloads
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