Innovation, Market Concentration, and Inequality with Endogenous Time Preferences

Colin Davis and Laixun Zhao

No DP2025-27, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

Abstract: We study how tax and transfer policies affect economic growth and income inequality in a framework in which growth, market structure and time preferences are all endogenously determined. Firm-level investment in product quality drives economic growth, creating a demand for household savings to finance both market entry and in-house R&D. By distinguishing between affluent households that invest in financial assets and poor households that live hand-to-mouth, and linking the former's savings to an endogenously determined discount rate, we derive the conditions for a stable balanced growth path. We then explore the effects of taxing the wage income and asset income of affluent households, while redistributing the proceeds to poor households, and find that diminishing marginal impatience introduces a new channel where both higher growth and lower inequality can be achieved, through tax policies that influence market concentration.

Keywords: Endogenous time preferences; Diminishing marginal impatience; Endogenous quality growth; Wage income taxes; Interest income taxes (search for similar items in EconPapers)
JEL-codes: E00 O31 O41 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2025-11
New Economics Papers: this item is included in nep-com, nep-fdg, nep-gro and nep-pub
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