Working Paper: NBER ID: w23987
Authors: Dominique Guellec; Caroline Paunov
Abstract: Income inequalities have increased in most OECD countries over the past decades; particularly the income share of the top 1%. In this paper we argue that the growing importance of digital innovation – new products and processes based on software code and data – has increased market rents, which benefit disproportionately the top income groups. In line with Schumpeter’s vision, digital innovation gives rise to ”winner-take-all” market structures, characterized by higher market power and risk than was the case in the previous economy of tangible products. The cause for these new market structures is digital non-rivalry, which allows for massive economies of scale and reduces costs of innovation. The latter stimulates higher rates of creative destruction, leading to higher risk as only marginally superior products can take over the entire market, hence rendering market shares unstable. Instability commands risk premia for investors. Market rents accrue mainly to investors and top managers and less to the average workers, hence increasing income inequality. Market rents are needed to incentivize innovation and compensate for its costs, but beyond a certain level they become detrimental. Public policy may stimulate innovation by reducing ex ante the market conditions which favor rent extraction from anti-competitive practices.
Keywords: digital innovation; income inequality; market rents; public policy
JEL Codes: D24; D31; D40; L10; O30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| digital innovation (O35) | market rents (R31) |
| market rents (R31) | income inequality (D31) |
| digital innovation (O35) | market concentration (L11) |
| market concentration (L11) | returns for capital owners (D33) |
| returns for capital owners (D33) | declining share of labor in national income (E25) |
| creative destruction (O39) | higher compensation for top executives (M12) |
| market volatility (G17) | higher compensation for top executives (M12) |