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Is Inequality Harmful for Innovation and Growth? Price versus Market Size Effects

Reto Foellmi and Josef Zweimüller ()

No 1613, Economics Working Paper Series from University of St. Gallen, School of Economics and Political Science

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: D30 D40 L16 O15 O31 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2016-07
New Economics Papers: this item is included in nep-fdg, nep-gro and nep-ino
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Is inequality harmful for innovation and growth? Price versus market size effects (2017) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:usg:econwp:2016:13

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