Income Distribution and Demand-Induced Innovations
University of St. Gallen - Swiss Institute for International Economics and Applied Economic Research
University of Zurich - Department of Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Institute for the Study of Labor (IZA)
IEW Working Paper No. 212
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.
Number of Pages in PDF File: 48
Keywords: Inequality, growth, demand composition, price distortion
JEL Classification: O15, O31, D30, D40, L16working papers series
Date posted: December 3, 2004
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