DP4985 Income Distribution and Demand-Induced Innovations

Author(s): Reto Foellmi , Josef Zweimüller

Publication Date: April 2005

Keyword(s): inequality , growth , demand composition , price distortion

JEL(s): D30 , D40 , L16 , O15 , O31

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP4985.asp

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.