Review of Economic Studies Vol. 73 No. 4 2006
Income Distribution and Demand-Induced Innovations
open access
Abstract
We introduce non-homothetic preferences into an innovation-based growth model and study how income and wealth inequality affect economic growth. We identify a (positive) price effect—where increasing inequality allows innovators to charge higher prices and (negative) market-size effects—with higher inequality implying smaller markets for new goods and/or a slower transition of new goods into mass markets. It turns out that price effects dominate market-size effects. We also show that a redistribution from the poor to the rich may be Pareto improving for low levels of inequality.
- DOI
- 10.1111/j.1467-937x.2006.00403.x
- Volume
- 73
- Issue
- 4
- Pages
- 941-960
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref