Effects of Patent Policy on Income and Consumption Inequality in an R&D-Growth Model

What are the effects of strengthening patent protection on income and consumption inequality? To analyze this question, this paper incorporates heterogeneity in the initial wealth of households into a canonical quality-ladder growth model with endogenous labor supply. In this model, I firstly show that the aggregate economy always jumps immediately to a unique and stable balanced-growth path. Given the balanced-growth behavior of the aggregate economy and an exogenous distribution of initial wealth, I then show that the endogenous distribution of assets in subsequent periods is stationary and equal to its initial distribution. The model predicts that strengthening patent protection increases (a) economic growth by stimulating R&D investment and (b) income inequality by raising the return on assets. However, whether it also increases consumption inequality depends on the elasticity of intertemporal substitution. If and only if this elasticity is less (greater) than unity, strengthening patent protection increases (decreases) consumption inequality. For standard parameter values, strengthening patent protection leads to a larger increase in income inequality than consumption inequality.