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Digital Innovation and the Distribution of Income

Dominique Guellec and Caroline Paunov ()

No 23987, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Income inequalities have increased in most OECD countries over the past decades; particularly the income share of the top 1%. In this paper we argue that the growing importance of digital innovation – new products and processes based on software code and data – has increased market rents, which benefit disproportionately the top income groups. In line with Schumpeter’s vision, digital innovation gives rise to ”winner-take-all” market structures, characterized by higher market power and risk than was the case in the previous economy of tangible products. The cause for these new market structures is digital non-rivalry, which allows for massive economies of scale and reduces costs of innovation. The latter stimulates higher rates of creative destruction, leading to higher risk as only marginally superior products can take over the entire market, hence rendering market shares unstable. Instability commands risk premia for investors. Market rents accrue mainly to investors and top managers and less to the average workers, hence increasing income inequality. Market rents are needed to incentivize innovation and compensate for its costs, but beyond a certain level they become detrimental. Public policy may stimulate innovation by reducing ex ante the market conditions which favor rent extraction from anti-competitive practices.

JEL-codes: D24 D31 D40 L10 O30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ino, nep-lma and nep-pay
Date: 2017-11
Note: PR
References: View references in EconPapers View complete reference list from CitEc
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Forthcoming: Digital Innovation and the Distribution of Income , Dominique Guellec, Caroline Paunov. in Measuring and Accounting for Innovation in the 21st Century , Corrado, Miranda, Haskel, and Sichel. 2019

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