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Income distribution and demand-induced innovation


Foellmi, R; Zweimüller, J (2006). Income distribution and demand-induced innovation. Review of Economic Studies, 73(4):941-960.

Abstract

We introduce non-homothetic preferences into an innovation-based growth model and study how income and wealth inequality affect economic growth. We identify a (positive) price effect -- where increasing inequality allows innovators to charge higher prices and (negative) market-size effects -- with higher inequality implying smaller markets for new goods and/or a slower transition of new goods into mass markets. It turns out that price effects dominate market-size effects. We also show that a redistribution from the poor to the rich may be Pareto improving for low levels of inequality.

Abstract

We introduce non-homothetic preferences into an innovation-based growth model and study how income and wealth inequality affect economic growth. We identify a (positive) price effect -- where increasing inequality allows innovators to charge higher prices and (negative) market-size effects -- with higher inequality implying smaller markets for new goods and/or a slower transition of new goods into mass markets. It turns out that price effects dominate market-size effects. We also show that a redistribution from the poor to the rich may be Pareto improving for low levels of inequality.

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47 citations in Web of Science®
57 citations 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:October 2006
Deposited On:11 Feb 2008 12:29
Last Modified:05 Apr 2016 12:22
Publisher:Wiley-Blackwell
ISSN:0034-6527
Publisher DOI:https://doi.org/10.1111/j.1467-937X.2006.00403.x

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