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Effects of Patents versus R&D Subsidies on Income Inequality

Chu, Angus C. and Cozzi, Guido (2017): Effects of Patents versus R&D Subsidies on Income Inequality. Forthcoming in: Review of Economic Dynamics

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Abstract

This study explores the effects of patent protection and R&D subsidies on innovation and income inequality using a Schumpeterian growth model with heterogeneous households. We find that although strengthening patent protection and raising R&D subsidies have the same macroeconomic effects of stimulating innovation and economic growth, they have drastically different microeconomic implications on income inequality. Specifically, strengthening patent protection increases income inequality whereas raising R&D subsidies decreases (increases) it if the quality step size is sufficiently small (large). An empirically realistic quality step size is smaller than the threshold, implying a negative effect of R&D subsidies on income inequality. We also calibrate the model to provide a quantitative analysis and find 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.

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