Working Paper: CEPR ID: DP7612
Authors: Reto Foellmi; Tobias Wuergler; Josef Zweimller
Abstract: We study a model of endogenous growth where firms invest both in product and process innovations. Product innovations (that open up completely new product lines) satisfy the advanced wants of the rich. Subsequent process innovations (that decrease costs per unit of quality) transform the luxurious products of the rich into conveniences of the poor. A prototypical example for such a product cycle is the automobile. Initially an exclusive product for the very rich, the automobile became affordable to the middle class after the introduction of Ford's Model T, the car that "put America on wheels". We show that an egalitarian society creates strong incentives for process innovations (such as the Model T) whereas an unequal society creates strong incentives for product innovations (new luxuries). We show that the inequality-growth relationship depends on which type of innovative activity drives technical progress, analyzing both the characteristics of and the transition to the balanced growth path.
Keywords: growth; inequality; mass production; process innovations; product innovations; technical change
JEL Codes: D30; D40; O15; O30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Income Inequality (D31) | Process Innovations (O31) |
| Income Inequality (D31) | Product Innovations (O31) |
| Egalitarian Society (P39) | Process Innovations (O31) |
| Unequal Society (P19) | Product Innovations (O31) |
| Product Innovations (O31) | Economic Growth (O49) |
| Process Innovations (O31) | Economic Growth (O49) |
| Inequality (D63) | Economic Growth (O49) |
| Inequality (D63) | Optimal Growth Level (O40) |
| Significant Drops in Inequality (D31) | Shift Towards Process Innovations (O31) |
| Shift Towards Process Innovations (O31) | Increased Mass Consumption (D10) |
| Increased Mass Consumption (D10) | Economic Growth (O49) |