A Demand Based Theory of Income Distribution and Growth
Boğaziçi University Department of Economics Research Papers are of preliminary nature, circulated
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A Demand Based Theory of Income Distribution and Growth∗
June 19, 2006
This paper builds a demand based theory of inequality and innovation-driven growth in a Schumpeterian
setting. When people have hierarchic preferences inequality affects innovation-driven growth through the
implied demand distribution over new goods. The paper examines the demand path of the firm through
its life-cycle under different growth and patent regimes and analyzes the efficiency of dynamic resource
allocation under different inequality scenarios. Unlike previous models, the monopolists are protected by
patents of finite length which gives rise to threshold effects in efficient redistributive schemes.
JEL classification: 014,015,031,H23
Keywords : innovation dynamics, finite patents, hierarchic preferences, wealth inequality.
∗I am grateful to Prof. Jess Benhabib and Boyan Jovanovic for their insight and suggestions. I also would like to thank
seminar participants at New York University, Yale University , University of Pennsylvania and Bogazici University. All errors
are my own.
†Department of Economics, Natuk Birkan Hall, Bosphorus University, Bebek , 34342, Istanbul, Turkey.
This paper analyzes the effect of inequality on innovation-driven growth when innovations are
protected by patents of finite length. In a static world, inequality affects the market size for the
innovators because richer consumers purchase more of the new goods than the poor consumers. In a
dynamic setup, changes in inequality bring about demand jumps and demand falls for a particular