We introduce non-homothetic preferences into an innovation-based growth model and study how income and wealth inequality affect economic growth.We identify a (positive)price effect-where increasing inequality allows innovators to charge higher prices and (negative)market-size effects-with higher inequality implying smaller markets for new goods and/or a slower transition of new goods into mass markets.It turns out that price effects dominate market-size effects.We also show that a redistribution from the poor to the rich may be Pareto improving for low levels of inequality.
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