This seminar paper reviews some of the approaches to the theory that links inequality to growth through the channel of innovations, focusing on the model developed by Foellmi and Zweimüller. In the next section, I connect the latter paper to works from the literature of endogenous growth and demand induced innovations. In section 3, I summarize the model by Foellmi and Zweimüller and outline the results of models with differing assumptions.
The last four decades have seen a clear trend of rising inequality across countries. This observation has initiated an intense debate among researches, policymakers, and civil society about the consequences of whether to counteract this trend. Discussions are mostly framed within the conception of an equity versus efficiency trade-off based on the premise that, even if equity might be desirable, some level of inequality is necessary to maintain economic performance incentives. However, recent theoretical and empirical literature has pointed out that inequality might also have negative economic consequences, such as lower economic growth. For instance, Neves, Afonso, and Silva (2016) find in a meta-study that 36 out of 41 analyzed estimations suggest a negative effect of inequality on growth, though the average effect of the Gini-coefficient on growth rates seems to be relatively small.
Theorists have argued about different channels through which inequality might affect growth, such as political instability, redistribution policies, or inefficient investments in human and physical capital through market imperfections. However, Zweimüller (2000a) points out that the role of demand on in centives to realize productive investments has been so far neglected by the literature. As an answer to this gap, a framework that allows to examine this channel has been elaborated through the works of Zweimüller (2000b), Matsuyama (2002), Foellmi and Zweimüller (2004, 2006, 2017), Foellmi, Wuergler, and Zweimüller (2014), Hatipoglu (2012), among others. The common question that guides this research body is, how does inequality affect economic growth through demand induced innovations?
Table of Contents
1 Introduction
2 Related literature
2.1 Endogenous growth
2.2 Inequality, demand and investment incentives
3 The effects of inequality on growth
3.1 Demand induced innovations
3.2 The sources of technological progress
3.3 Competition and IPR policy
4 Conclusion
Research Objectives and Topics
This paper aims to analyze the complex relationship between income inequality and economic growth, specifically focusing on the channel of demand-induced innovation and the incentives for research and development (R&D). The central research question explores how variations in income distribution shape market structures and demand preferences, thereby influencing technological progress and long-term economic expansion.
- Theoretical frameworks linking inequality to innovation
- The role of non-homothetic preferences in product development
- Market-size effects versus price effects of inequality
- Impact of competition and Intellectual Property Rights (IPR) on growth
Excerpt from the Book
3.1 Demand induced innovations
I start this section presenting the model developed by Foellmi and Zweimüller (2006) (from now on also referred to as FZ model or FZ framework). This model describes an industry sector in which differentiated goods are produced by monopolists who have acquired life-long patents for the production-rights of a particular good. The blue prints to produce new types of goods are created by R&D firms, so one possible interpretation of this is that industry firms get access to the production-rights by buying the patents from the R&D sector.
Technological progress is modeled as a consequence of spillovers from research activities. This assumption can be understood by the non-rivalry and non-excludability of knowledge: because of this, the ideas generated in the process of creating blue prints for new types of goods can be implemented by producers of goods and researchers in their work, thereby increasing productivity of labor in the industry and the R&D sector.
The FZ model assumes the labor market to be perfectly competitive, which means that wages are determined by the level of labor productivity. As new goods are invented and productivity grows, wages increase in the labor market, making households richer and increasing their willingness to pay for consumption goods.
Summary of Chapters
1 Introduction: Provides an overview of the debate regarding inequality and economic growth, introducing the mechanism of demand-induced innovations.
2 Related literature: Reviews existing theories on endogenous growth and discusses how inequality affects investment incentives through market demand.
3 The effects of inequality on growth: Analyzes the specific impacts of income distribution on R&D incentives, technological sources, and policy environments.
4 Conclusion: Synthesizes the theoretical findings and discusses the net effects of inequality on economic growth under varying assumptions of competition.
Keywords
Inequality, Economic Growth, R&D, Innovation, Endogenous Growth, Income Distribution, Market Size, Price Effect, Monopolies, Intellectual Property Rights, Technological Progress, Non-homothetic Preferences, Productivity, Demand, Investment
Frequently Asked Questions
What is the fundamental focus of this paper?
The paper examines how income inequality influences economic growth, specifically through the mechanisms of innovation and R&D investment.
What are the primary thematic fields covered?
The key themes include endogenous growth theory, the role of consumer demand and income distribution in shaping innovation, and the impact of market competition on technological advancement.
What is the central research question?
The research asks how income inequality affects economic growth via the channel of demand-induced innovations and how different market assumptions alter this relationship.
Which scientific methodology is utilized?
The author employs a theoretical review and analysis of existing economic models, particularly the Foellmi and Zweimüller (FZ) framework, to contrast different theoretical approaches.
What is the core content of the main section?
The main section details the FZ model, evaluates the sources of technological progress (product vs. process innovation), and discusses the influence of competition and IPR policy on the growth-inequality nexus.
Which keywords best characterize this work?
Key terms include Inequality, Economic Growth, Innovation, R&D, Endogenous Growth, and Market Size effects.
How do "price effects" differ from "market size effects" in the context of inequality?
Price effects refer to the increased willingness of the rich to pay for new goods, which can incentivize innovation, while market size effects refer to the potential delay in mass production reach due to lower income levels of the poor.
Why is the distinction between product and process innovation relevant?
The distinction is crucial because the impact of inequality on growth depends on which type of innovation is more dominant; if process innovation is the main driver, the effects of income distribution on growth may be ambiguous or even negative.
- Arbeit zitieren
- Mariano Calderón (Autor:in), 2019, The effects of inequality on growth through research and development, München, GRIN Verlag, https://www.grin.com/document/899511
