Innovation and Growth with Rich and Poor Consumers

This work studies the impact of income inequality on the level of innovative activities in a model where innovations result in quality improvements. In contrast to the standard model of innovations and growth, the equilibrium outcome may be characterized by a situation where not only the quality leader but also producers of worse qualities are on the market. In that case the quality leader sells to the rich, whereas the producer of the second-best quality sells to the poor. In general, we find that a more equal distribution of income is favourable for innovation incentives. This is consistent with empirical evidence suggesting that countries with a more equal distribution of income have grown faster