Chu, Angus C. and Cozzi, Guido: " Effects of Patents versus R&D Subsidies on Income Inequality ",Review of Economic Dynamics, forthcoming.

Effects of Patents versus R&D Subsidies on Income Inequality

Chu, Angus C

China Center for Economic Studies, School of Economics, Fudan University.

Cozzi, Guido 

Department of Economics, University of St. Gallen.

Abstract:

This study explores the effects of patent protection and R&D subsidies on economic growth 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 effect of stimulating 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.