DP1855 Innovation and Growth with Rich and Poor Consumers

Author(s): Johann K Brunner , Josef Zweimüller

Publication Date: April 1998

Keyword(s): Growth , Inequality , Innovation , Product Quality

JEL(s): H23 , O14 , O15 , O31

Programme Areas: Human Resources

Link to this Page: www.cepr.org/pubs/dps/DP1855.asp

This paper studies the impact of income inequality on the level of innovative activity in a model where innovations result in quality improvements. The market for quality goods is characterized by a natural oligopoly with two types of consumers – rich and poor. In general, we find that for reasons of strategic price setting a more equal distribution is favourable for innovation incentives. This is consistent with empirical evidence, suggesting that countries with a more equal distribution have grown faster.