Income Distribution And Demand-induced Innovation

China’s economy has entered a new phase of “gearshift and deceleration”,facing the serious challenge of significantly slower growth and increased downward pressure.How to shift the growth momentum and how to achieve high-quality development is an urgent issue.In 2020,China has achieved a great victory in poverty eradication,and built a moderately prosperous society in an allround way.Promoting common prosperity has become a major task and historical mission of China’s development.Innovation is the first driving force to lead development,and whether or not the continuous improvement of income distribution in the process of comprehensively promoting common prosperity can provide powerful support for economic development through demandinduced innovation.Although innovation-driven growth theories assert that technology innovation is the core factor to explain economic growth and cross-country income disparity,and acknowledge that demand for innovation is the key to understanding technological progress,they overemphasize the decisive role of the supply side on technological innovation,and put the demand side in a passive and subordinate position.The reason for this is that innovation-driven growth theory is based on the representative consumer assumption and the homothetic preference assumption,which imply that each consumer receives the same utility and benefits from each technology,thus weakening the direct role of the demand side in driving technological innovation.In addition,the existing studies on demand-driven innovation have many limitations in the pricing mechanisms and limiting price of innovative products,which fail to fully portray the price effect and market size effect of demanddriven innovation.Therefore,it is important to break through the limitations of innovation-driven growth theory that weakens the demand side,and to improve and develop the theory of demandinduced innovation to study the intrinsic linkage between the income distribution and technological innovation,economic growth,structural transformation and carbon reduction,which is not only of academic value,but also provides guidance for how to achieve high-quality economic development in the process of common prosperity.The present paper focuses on revealing the demand-side incentive effects on technological innovation,improving and expanding the theory of demand-induced innovation in terms of transmission channels,study framework,mechanism integrity,and research scope,as well as analyzing the direct pulling effect of income distribution through demand-induced innovation on innovation resource allocation,sectoral technological progress,economic growth,structural transformation,and environmental policy and carbon reduction.The research objectives of this paper focus on the following points.(i)To expand the channels of demand-induced innovation,i.e.,how to analyze the impact of income inequality,income growth,and income uncertainty on the allocation of innovation resources and their underlying mechanisms in a general equilibrium model.(ii)How to extend the study framework of demand-induced innovation from the expanding consumer goods variety to consumer goods quality innovation,investigating the new insights of creative destruction on demand-induced innovation,and analyzing the economic effects of income inequality and demand shocks on consumer goods quality innovation and sectoral technological progress.(iii)How to further improve the theory of demand-induced innovation through the inntroduction of income distribution,pricing mechanism and price limiting of innovative products,and to characterize the price effect and market size effect,and then study the role of income distribution and consumption structure in driving economic growth.(iv)To endogenize the sectoral technological progress through the demand-induced innovation,to connect the demand and supply mechanisms of structural transformation,to resolve the theoretical differences between the sectoral market size and the sectoral technological progress,and to examine the impact of improving the income distribution on the structural transformation.(v)Building a demand-induced clean technology bias model based on the demand-induced innovation,to reveal the direct pulling effect of income distribution on clean technology transition and carbon reduction,and the "inverted Ushaped" trend of environmental policy on carbon emission is reasonably depicted on the basis of a complete characterization of the path dependence of pollution and clean technology.This paper uses numerical simulations not only to solve model equilibrium solutions,examine transfer dynamics,and analyze demand-induced innovation mechanisms,but also to quantify the effect of income distribution on innovation resource allocation,sectoral technological progress,economic growth,structural transformation,and clean technology transformation and carbon emissions.The main findings of this paper are as follows:First,the Pareto income distribution is generated through the Kolmogorov forward equation,in which the inequality index of the Pareto distribution can be decomposed into the growth rate of income and income uncertainty,thus extending the channel of demand-induced innovation in the expanding consumer goods variety model.In terms of the intrinsic mechanism,income inequality affects technological innovation by the relative trade-off between price effect and market size effect,and thus there is an "inverted U-shaped" relationship between income inequality and innovation resource allocation;higher income growth rate exerts positive incentives on innovation resource allocation through the expected increase in market size;income uncertainty inhibits innovation resource allocation by increasing precautionary savings.Second,the research framework of demand-induced innovation is extended from a general equilibrium model of the expanding consumer goods variety to a general equilibrium model of consumer goods quality innovation,which not only provides a complete characterization of price and market size effects,but also explores the new insights of creative destruction on pricing mechanism and liming price of innovative products.In terms of income distribution effects,whether by reducing the population share of low-income group or increasing the per capita income of lowincome group to improve the income distribution,they can play a catalytic role in innovation incentives and sectoral technological progress;expanding consumer demand can also stimulate technological innovation and accelerate sectoral technological progress,but the economic effects of demand shocks of high-income group are stronger than those of low-income group.Third,by introducing the Pareto income distribution,hierarchic preferences,and noninnovation products that are inseparable from the innovation product in the utility,the marginal costplus pricing of the innovation product is realized based on the principle of maximizing the profit of innovation firms.Since the markups depends on the inequality index of the Pareto income distribution,the theoretical model endogenizes the price and market size of the innovative product at the same time,and then fully characterizes the price and market size effects of the demandinduced innovation.Numerical simulations reveal that: given large income inequality,the market size effect plays a dominant role in demand-induced innovation,and thus a more equal income distribution helps the economy move to a higher growth trajectory;for a given income distribution,the consumption structure also has a direct impact on economic growth and investment rate through demand-induced innovation;the Gini coefficient has a non-linear decreasing relationship with social welfare,and excessive income inequality can result in severe welfare losses.Fourth,the endogenous sectoral technological progress is achieved through demand-induced innovation,which solves the problem of the exogenous sectoral technological progress hypothesis severing the demand and supply mechanisms of structural transformation,and introduces differential return to technological specialization to resolve the theoretical divergence between sectoral market size and sectoral technological progress.The theoretical model not only reconciles the "Kaldor fact" and the "Kuznets fact",but also rationalizes the stylized facts of the existence of sectoral product prices and sectoral innovation resources,and shows that a more equitable income distribution can promote and accelerate structural transformation.Fifth,based on demand-induced innovation,the incentives for directed clean technology are attributed to the relative price and relative market size of clean consumer goods,which in turn reveals the direct pull of the demand side on clean technology transition and carbon reduction.An asymmetric technological progress is introduced for polluting and clean technologies,which not only fully characterizes the path dependence,but also the relative market size of clean consumer goods controls the two technologies progress.Numerical simulations find that income inequality regulates and constrains the relative market size of clean consumer goods,resulting in two technologies increasing and decreasing with their market size.Therefore,income distribution determines the timing of clean technology transformation and leads to an "inverted U-shaped" trend in carbon emissions under environmental policies.This present paper not only overcomes the limitations of innovation-driven growth theory that weakens the demand side,but also extends and improves the demand-induced innovation theory in terms of channels,research framework,mechanism integrity and research scope,and explores the pulling effect of income distribution on innovation resource allocation,sectoral technological progress,economic growth,structural transformation,as well as clean technology transformation and carbon reduction.At the same time,the research on income distribution and demand-induced innovation has important practical implications for how to transform growth momentum and achieve high-quality development in the process of common prosperity.It can provide guidance and reference for realistic issues such as playing the basic position of consumption in the economy and society,upgrading both consumption and industry,constructing a higher-level dynamic balance of supply and demand,accelerating the structural transformation,and promoting clean production and life style and carbon peaking.