Fulvio Castellacci (University of Oslo)

Innovation, Income Inequalities and Public Policies

Abstract. Innovation fosters economic growth and the performance of national systems. At the same time, though, recent literature shows that innovation is also a source of increasing income inequalities. Public policies face thus an important trade-off between efficiency and equity effects of innovation. What are the possible policy strategies to address this trade-off? The paper presents a model of innovation, income inequality and public policies. The model points out two distinct sources of inequalities: on the one hand, technological change affects the income share of different economic groups (capitalists, employed workers, unemployed); on the other, innovation does also foster wage inequalities among workers with different skills. We empirically calibrate the model for the US economy, and carry out a simulation analysis to investigate and compare the effects of different policies aimed at reducing inequality effects of innovation. Specifically, we compare two distinct policy strategies: one is based on a standard economic policy approach that increases taxes in order to finance additional public spending and welfare policies; the other is based on a new approach – in line with the Entrepreneurial State – in which innovation is also produced by public companies, whose profits can in turn be used to finance welfare programs. The results point out advantages and drawbacks of different strategies, and show that the optimal policy strategy largely depends on the policy maker’s preferences regarding income distribution and hence its degree of inequality aversion.