Redistributive policy and R&D-based growth

Abstract

This study examines how redistributive policy that attempts to reduce inequality by taxing the bequests of the rich and redistributing the revenue to the poor affects economic growth in an overlapping generations model of R&D-based growth with both product development and process innovation. We show that such a policy simultaneously increases growth and reduces inequality in the long-run. When the market structure adjusts, partially reducing inequality in the short-run, the effect of redistributive policy on economic growth depends on the values of the social return to variety parameter. However, when the market structure adjusts fully in the longrun, the redistributive policy decreases the entry of new firms but raises economic growth and reduces inequality.