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


Foellmi, Reto; Zweimüller, Josef (2017). Is inequality harmful for innovation and growth? Price versus market size effects. Journal of Evolutionary Economics, 27(2):359-378.

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.

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.

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1 citation in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Uncontrolled Keywords:Inequality; growth; demand composition; Price distortion
Language:English
Date:2017
Deposited On:21 Dec 2016 09:57
Last Modified:25 Mar 2017 02:01
Publisher:Springer
ISSN:0936-9937
Publisher DOI:https://doi.org/10.1007/s00191-016-0451-y
Official URL:http://link.springer.com/journal/191

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