A Demand Based Theory of Income Distribution and Growth∗

This paper builds a demand based theory of inequality and innovation-driven growth in a Schumpeterian setting. When people have hierarchic preferences inequality affects innovation-driven growth through the implied demand distribution over new goods. The paper examines the demand path of the firm through its life-cycle under different growth and patent regimes and analyzes the efficiency of dynamic resource allocation under different inequality scenarios. Unlike previous models, the monopolists are protected by patents of finite length which gives rise to threshold effects in efficient redistributive schemes. JEL classification: 014,015,031,H2