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

To analyze the effects of patent policy on growth and inequality, this paper develops a quality-ladder model with wealth heterogeneity and elastic labor supply. The model predicts that strengthening patent protection increases (a) growth by stimulating R&D and (b) income inequality by raising the return on assets. Elastic labor supply creates an additional effect on income inequality. As for consumption inequality, the effect is ambiguous and depends on the elasticity of intertemporal substitution. Calibrating the model to US data shows that strengthening patent protection increases income inequality by more than consumption inequality, and this pattern is consistent with the data.