DP1880 Schumpeterian Entrepreneurs Meet Engel's Law: The Impact of Inequality on Innovation-Driven Growth

Author(s): Josef Zweimüller
Publication Date: May 1998
Keyword(s): Growth, hierarchic demand, Inequality, Innovation
JEL(s): H23, O14, O15, O31
Programme Areas: International Macroeconomics, Human Resources
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1880

This paper analyses the impact of inequality on growth when technical progress is driven by innovations. It is assumed that consumers have hierarchic preferences. As a result inequality affects demand and therefore the incentive to innovate. Whether more inequality is harmful or beneficial for growth depends on the initial distribution. Complementarities between a technical and a pecuniary externality resulting from the innovation process may generate multiple equilibria. Redistribution may push an economy trapped in underdevelopment to a high-growth regime.