The relationship between inequality and innovative activity: a Schumpeterian theory and evidence from cross-country data

This article examines the effect of inequality on technological progress when innovations are protected by patents of finite length. It provides a Schumpeterian theory of the non-linear relationship between income distribution and innovative activity in a dynamic general equilibrium setting. Additionally, the theory is empirically tested by investigating how inequality affects innovative activities in a cross-country setting. Using two new data sets on inequality, one linear and two non-linear dynamic panel data models are estimated. The results are robust to two common inequality measures. They support the hypothesis that there is an overall negative relationship between inequality and innovative activity and the relationship is non-linear but not necessarily an inverted-U.