Innovation and Growth with Rich and Poor Consumers

This paper studies the impact of income inequality on the level of innovative activities in a model where innovations result in quality improvements. The market for quality goods is characterised by a natural oligopoly with two types of consumers - rich and poor. In general, we find that for reasons of strategic price setting 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.