Innovation, Income Inequalities and Public Policies

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 (labor and profit taxes; R&D tax; technology regulation; transfers and training policies for unemployed workers). The results point out advantages and drawbacks of different policies, 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.

About Fulvio Castellacci

Fulvio Castellacci is Professor at the TIK Centre, University of Oslo. He has a PhD from the University of Oslo (2004) and a PhD from the University of Rome La Sapienza (2005). He has been Director of the TIK Centre between 2014 and 2022. His research is in the economics of innovation, with a particular focus on the impacts of new technologies on the economic performance of firms, sectors and national systems. Castellacci has published more than fifty articles in peer-reviewed international journals, and he serves as Associate Editor for the Journal of Economic Surveys, and as Advisory Editor for Research Policy.