Working Paper: CEPR ID: DP4985
Authors: Reto Foellmi; Josef Zweimller
Abstract: We utilize Schmookler?s (1966) concept of demand-induced invention to study the role of income inequality in an endogenous growth model. As rich consumers can satisfy more wants than poor consumers, both prices and market sizes for new products, as well as their evolution over time, are determined by the income distribution. We show how a change in the distribution of income affects the incentive to innovate and hence long-run growth. In general, less inequality tends to discourage the incentive to innovate, but this depends on the nature of the redistribution.
Keywords: Demand; Composition; Growth; Inequality; Price Distortion
JEL Codes: D30; D40; L16; O15; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Income distribution changes (D31) | Willingness to pay of rich consumers (D11) |
| Willingness to pay of rich consumers (D11) | Innovators' profits (O39) |
| Innovators' profits (O39) | Incentive to innovate (O31) |
| Income distribution changes (D31) | Incentive to innovate (O31) |
| Decrease in income inequality (D31) | Incentive to innovate (O31) |
| Larger market size for new products (D40) | Innovators' profits (O39) |
| Larger market size for new products (D40) | Incentive to innovate (O31) |
| Income inequality (D31) | Incentive to innovate (O31) |
| Income inequality (D31) | Long-run growth (O49) |