This article examines the effect of inequality on technological progress when innovations are protected by patents of finite length. It provides a Schumpeterian theory of the non‐linear relationship between income distribution and innovative activity in a dynamic general equilibrium setting. Additionally, the theory is empirically tested by investigating how inequality affects innovative activities in a cross‐country setting. Using two new data sets on inequality, one linear and two non‐linear dynamic panel data models are estimated. The results are robust to two common inequality measures. They support the hypothesis that there is an overall negative relationship between inequality and innovative activity and the relationship is non‐linear but not necessarily an inverted‐U.

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In this paper we analyze a general equilibrium model in which agents choose to be employed in formal or in the informal sector. The formal sector is taxed to provide income subsidies and the level of redistribution is determined endogenously through majority voting. We explore how the demand for redistribution determined by majority voting interacts with the incentive to work in the untaxed informal market. We also investigate how different levels of the informal sector wage can explain simul-

High correlation of stock price indices among a relatively large number of developed and emerging markets indicates that bubbles might spill over from one country to another. To test for such spill-over effects we estimate the bubble component of price changes using a non-linear structural state space model with time-variable parameters.We apply directionality tests to bubbles formed in USA and Turkey. We find that bubbles originating in USA lead to bubbles in Turkey. We provide empirical evidence on bubbles formed during major financial crises of the last two decades in Turkey and the last century in US. Despite the improvement in fundamentals and overall economic performance, we find Turkish asset market is still subject to volatile financial bubbles that might stem from abroad.JEL classification: G12, E44, C32