Working Paper: CEPR ID: DP1880
Authors: Josef Zweimuller
Abstract: This paper analyses the impact of inequality on growth when technical progress is driven by innovations. It is assumed that consumers have hierarchic preferences. As a result inequality affects demand and therefore the incentive to innovate. Whether more inequality is harmful or beneficial for growth depends on the initial distribution. Complementarities between a technical and a pecuniary externality resulting from the innovation process may generate multiple equilibria. Redistribution may push an economy trapped in underdevelopment to a high-growth regime.
Keywords: innovation; growth; inequality; hierarchic demand
JEL Codes: H23; O14; O15; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Income Inequality (D31) | Lower Initial Demand for New Products (L15) |
| Lower Initial Demand for New Products (L15) | Decreased Incentive to Innovate (O31) |
| Income Inequality (D31) | Decreased Incentive to Innovate (O31) |
| Higher Inequality (Regime ii) (D31) | Smaller Market Size for Innovations (O36) |
| Smaller Market Size for Innovations (O36) | Harmful for Growth (O44) |
| Higher Inequality (Regime iii) (D31) | Beneficial for Growth (O40) |
| Beneficial for Growth (O40) | Incentivizes Further Innovation (O31) |
| Multiple Equilibria (D59) | Growth Rate Influenced by Expectations and Coordination Failures (O49) |
| Expectations and Coordination Failures (D84) | Inhibit Transition from Low-Growth to High-Growth Regime (O25) |