Schumpeterian entrepreneurs meet Engel's law: The impact of inequality on innovation-driven growth

Abstract

This article analyzes the impact of inequality on growth when consumers have hierarchic preferences and technical progress is driven by innovations. With hierarchic preferences, the poor consume predominantly basic goods, whereas the rich consume also luxury goods. Inequality has an impact on growth because it affects the level and the dynamics of an innovator's demand. It is shown that redistribution from very rich to very poor consumers can be beneficial for growth. In general, the growth effect depends on the nature of redistribution. Due to a demand externality from R & D activities, multiple equilibria are possible.