Effects of patents versus R&D subsidies on income inequality

Abstract

This study explores the e¤ects of patent protection and R&D subsidies on economic growth and income inequality using a Schumpeterian growth model with heterogeneous households. We …nd that although strengthening patent protection and raising R&D subsidies have the same macroeconomic e¤ect of stimulating economic growth, they have drastically di¤erent microeconomic implications on income inequality. Speci…cally, strengthening patent protection increases income inequality whereas raising R&D subsidies decreases (increases) it if the quality step size is su¢ ciently small (large). An empirically realistic quality step size is smaller than the threshold, implying a negative e¤ect of R&D subsidies on income inequality. We also calibrate the model to provide a quantitative analysis and …nd that strengthening patent protection causes a moderate increase in income inequality and a negligible increase in consumption inequality whereas raising R&D subsidies causes a relatively large decrease in both income inequality and consumption inequality.JEL classi…cation: D30, O30, O40

Innovation and inequality in a monetary Schumpeterian model with heterogeneous households and firms

“…Finally, the government provides a lump-sum transfer t to each household. 11 From standard dynamic optimization, household h's consumption path is given by…”

“…10 It can be shown as a no-arbitrage condition that the rate of return on borrowing b t (h) must equal r t + t . 11 The transfer is …nanced by seigniorage. Alternatively, we can assume that seigniorage is used to …nance a public good, in which case all our results would be the same so long as the (potentially utility-enhancing) public good is non-productive.…”

“…where the parameter 2 (0; 1) determines the shape of the Pareto distribution. Given that the expected value of t (j) is equal across industries, (11) implies that the expected value e t (j) of monopolistic pro…t t (j) is also the same across industries such that e t (j) = e t for j 2 [0; 1]. Therefore, we follow the standard treatment to focus on the symmetric equilibrium in which the arrival rate of innovation is equal across industries, such that t (j) = t for j 2 [0; 1].…”

“…where the last equality uses the aggregate consumption path in (4) and the property that c t and v t both grow at the steady-state equilibrium growth rate in (23). Then, substituting (11) and (24) into the entry…”

“…Our study complements these interesting studies by exploring the e¤ects of monetary policy on innovation and income inequality. Chu and Cozzi (2018) explore the e¤ects of R&D subsidies and patent policy on income inequality, but not monetary policy. More importantly, Chu and Cozzi (2018) focus on a Schumpeterian growth model with a constant step size of quality improvement.…”