Income inequality and technological progress: The effect of R&D incentives, integration, and spillovers

• Published date: 01 December 2020
• Author: António Osório,Alberto Pinto
• Date: 01 December 2020
• DOI: http://doi.org/10.1111/jpet.12466

J Public Econ Theory. 2020;22:1943–1964. wileyonlinelibrary.com/journal/jpet © 2020 Wiley Periodicals LLC

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1943

Received: 1 May 2019

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Accepted: 29 July 2020

DOI: 10.1111/jpet.12466

ORIGINAL ARTICLE

Income inequality and technological progress:

The effect of R&D incentives, integration,

and spillovers

António Osório

1

|Alberto Pinto

2

1

Department of Economics, Facultat

d'Economia i Empresa, Universitat Rovira i

Virgili and Eco‐SOS, Reus (Barcelona),

Spain

2

Department of Mathematics, Faculdade de

Ciencias, Universidade do Porto and

INESC‐TEC, Porto, Portugal

Correspondence

António Osório, Department of Economics,

Facultat d'Economia i Empresa, Universitat

Rovira i Virgili, Av de la Universitat 1,

43204 Reus (Barcelona), Spain

Email: antonio.osoriodacosta@urv.cat

Funding information

Spanish Ministry of Science and

Innovation, Grant/Award Numbers:

RTI2018‐094733‐B‐100,

PID2019‐105982GB‐I00; Portuguese

Foundation for Science and Technology

(FCT), Grant/Award Numbers:

PTDC/MAT‐NAN/6890/2014,

PTDC/MAT‐APL/31753/2017

Abstract

Recent years witnessed an increase in income in-

equality. Several explanations have been put forward.

In the present paper, we consider a series of tech-

nologically related events that have been crucial for

the increased income inequality, that is, public R&D

incentives, increasing horizontal integration and

spillover effects. We found that public R&D in-

centives and the increasing horizontal integration

have biased the income distribution towards the top

income group. In particular, the high‐skilled workers

involved in the R&D process have benefited en-

ormously from this process. Similarly, capital owners

have seen an increase in their profits, because of the

reduction in product market competition and tech-

nological improvements in the production process.

We found the effect of knowledge spillovers to be less

clear‐cut. We conclude discussing the implications of

our results and suggesting possible solutions to the

increasing income inequality. We call for the creation

of supranational institutions, and for stricter legisla-

tion on competition and antitrust policy.

1|INTRODUCTION

Recent decades have witnessed a persistent and general increase in income inequality and

polarization (Piketty & Saez, 2006). The World Economic Forum's Inclusive Growth and De-

velopment Report (2015) shows that income distribution is favoring the top two quintiles

worldwide (Samans, Blanke, Corrigan, & Drzeniek 2015). Simultaneously, there has been a

clear and robust rise in the share of capital income and in the wealth inequality (Piketty, 2014;

Piketty & Zucman, 2014). Referring to this issue, the former US President, Barack Obama, said

that tackling inequality and wage stagnation is the United States' foremost challenge. In this

context, we question what forces are driving the increasing income inequality and what can be

done to reverse this process.

The answer to those questions is far from trivial, as it involves considerations from almost

every field in economics, in particular macroeconomics. In this paper, we try to address these

fundamental questions in a completely different way by offering a novel perspective from

industrial organization and competitive markets.

In this context, we study how the increases in (a) public R&D incentives, (b) horizontal

integration, and (c) knowledge spillovers have affected the firms' strategies, and consequently,

the income distribution and inequality, by analyzing their impact on the top income (i.e., the

capital and the high‐skilled workers' income) and the bottom income (i.e., the low/medium‐

skilled workers' income).

To address these issues, we present a simple theoretical model with spillovers, in line with the

d'Aspremont and Jacquemin (1988) model, but in which R&D cooperation cannot be disentangled

from product market cooperation, as in López and Vives (2019).

1

The objective is to study how the

aforementioned technologically related aspects affect different types of income in contexts in which

firms strategically compete for consumers in terms of price and technological efficiency.

The model generates interesting trade‐offs with implications for income distribution and

inequality. In this context, we consider two income groups. The top income group, which

consists of the capital income (i.e., the returns associated with the firms' profits) and the high‐

skilled workers' income (i.e., the returns associated with the firms' R&D process), and the bottom

income group, which consists of the low/medium‐skilled workers' income (i.e., the returns as-

sociated with the firms' manufacturing process).

Subsequently, we analyze the impact of increasing (a) public R&D incentives, (b) horizontal

integration, and (c) knowledge spillovers on these different types of incomes and discuss its

consequences in terms of income inequality.

In what follows, we summarized the obtained results.

(a) Increasing public R&D incentives.

According to the OECD, in the most developed countries, direct spending on R&D activities has

been well above 3% of the gross domestic product (GDP) in 2015, and if we consider other indirect

spending, such as education, then the involvement of governments in R&D is much higher. Similar

reasoning applies to private R&D investments. Between 50% and 60% of private R&D expenses

consist of high‐skilled workers' salaries, which seem to have biased the job market in favor of high‐

skilled workers (Giandrea & Sprague, 2017; Lokshin & Mohnen, 2013;Wolff&Reinthaler,2008). In

this paper, we want to understand the income distribution and inequality implications of these large

investments and mobilization of resources into the R&D activities.

1

In an early influential work on R&D and market performance, Spence (1984) introduced a spillover parameter as a way

of modeling the imperfect appropriability of R&D in competitive markets. Subsequently, a large body of literature has

followed this approach, for example, M. Katz (1986), d'Aspremont and Jacquemin (1988), Kamien, Muller, and Zang

(1992), Amir, Evstigneev, and Wooders (2003), or more recently Cosandier, De Feo, and Knauff (2017) and Amir, Liu,

Machowska, and Resende (2019), just to mention a few.

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OSÓRIO AND PINTO