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Innovation and Inequality from Stagnation to Growth

Chu, Angus C. and Peretto, Pietro (2019): Innovation and Inequality from Stagnation to Growth.

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Abstract

This study explores the evolution of income inequality in an economy featuring an endogenous transition from stagnation to growth. We incorporate heterogeneous households into a Schumpeterian model of endogenous takeoff. In the pre-industrial era, the economy is in stagnation, and income inequality is determined by an unequal distribution of land ownership and remains stationary. When takeoff occurs, the economy experiences innovation and economic growth. In this industrial era, income inequality gradually rises until the economy reaches the balanced growth path. We calibrate the model for a quantitative analysis and compare the simulation results to historical data in the UK. Extending the analysis to allow for endogenous labor supply, we find that endogenous labor supply introduces a channel through which inequality contributes to shaping the transition path of the economy and that households sort themselves into a leisure class that supply zero labor and the rest of society that supplies labor.

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