Inequality and Demand-Driven Innovation: Evidence from International Patent Applications

This paper studies how the distribution of income across consumers affects innovation by affecting the demand for new goods. Within a model with non-homothetic preferences, we show that inequality is more likely to be harmful for innovation when innovations become more incremental, but that it is more likely to be beneficial when the size of the population is increased. The model is extended to a multi-country setting in which it is shown that inequality affects the number of patent flows (applications of patents that are already granted elsewhere) towards a country in the same way as it affects innovation. In an empirical analysis based on a large panel data set from PATSTAT, we find that inequality is more likely to increase and less likely to decrease international patent flows towards a country the larger the size of the population and the lower GDP of the country is. These results are in line with the model predictions and robust to the inclusion of many control variables.