RIEB Discussion Paper Series No.2025-27

Title

Innovation, Market Concentration, and Inequality with Endogenous Time Preferences

Abstract

We study how tax and transfer policies affect economic growth and income inequality in a framework in which growth, market structure and time preferences are all endogenously determined. Firm-level investment in product quality drives economic growth, creating a demand for household savings to finance both market entry and in-house R&D. By distinguishing between affluent households that invest in financial assets and poor households that live hand-to-mouth, and linking the former's savings to an endogenously determined discount rate, we derive the conditions for a stable balanced growth path. We then explore the effects of taxing the wage income and asset income of affluent households, while redistributing the proceeds to poor households, and find that diminishing marginal impatience introduces a new channel where both higher growth and lower inequality can be achieved, through tax policies that influence market concentration.

Keywords

Endogenous time preferences; Diminishing marginal impatience; Endogenous quality growth; Wage income taxes; Interest income taxes

JEL Classification

E00, O31, O41

Inquiries

Colin DAVIS
The Institute for the Liberal Arts, Doshisha University, JAPAN

Laixun ZHAO
Research Institute for Economics and Business Administration,
Kobe University, JAPAN
Rokkodai-cho, Nada-ku, Kobe
657-8501 Japan
Phone: +81-78-803-7036
FAX: +81-78-803-7059