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Royal Economic Society

Royal Economic Society

Royal Economic Society The RES Prize Presented by Rachel Griffith

Royal Economic Society The RES Prize Michele PELLIZZARI and Giacomo DE GIORGIO

Royal Economic Society

Royal Economic Society The Economic Journal Lecture Philippe Aghion Innovation and Top Income Inequality Chair: Rachel Griffith

Royal Economic Society

Royal Economic Society

Economic Journal Lecture: Innovation and Top Income Inequality Philippe Aghion RES - 31 March 2015 Philippe Aghion () Innovation and Top Income Inequality RES - 31 March 2015 1 / 48

Innovation and Top Income Inequality Introduction Introduction Past decades have witnessed a sharp increase in top income inequality worldwide and particularly in developed countries Philippe Aghion () Innovation and Top Income Inequality RES - 31 March 2015 2 / 48

US MALE WAGE INEQUALITY, 1937-2005 Source: Goldin and Katz (2008)

Income shares at the very top over last 100 years: US top 1% increases from 9% in 1978 to 22% in 2012 30 25 US Top 1% 20 Percentile Share 15 US Top 0.1% 10 5 0 1918 1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 U.S. Top 1% U.S. Top 0.1% Source : Atkinson, Piketty & Saez; High Income Database

Percentile Share 10 15 20 25 0 5 Income shares at the very top: UK top 1% increases 1918 1920 1922 1924 1926 1928 1930 1932 1934 from 6% in 1978 to 14% in 2009 1936 1938 1940 1942 1944 1946 1948 1950 U.K. Top 1% 1952 1954 1956 1958 Source : Atkinson, Piketty & Saez; High Income Database 1960 1962 1964 1966 U.K. Top 0.1% 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 UK Top 0.1% UK Top 1%

Innovation and Top Income Inequality Introduction Introduction However no consensus has been reached as to the main underlying factors behind this surge in top income inequality In this lecture we shall argue that innovation is certainly one such factor and that it also affects social mobility. Philippe Aghion () Innovation and Top Income Inequality RES - 31 March 2015 3 / 48

Innovation and Top Income Inequality Introduction Three parts to the lecture: Part 1: Model 1 − → we develop a Schumpeterian model of innovation, top income inequality and social mobility Part 2: Empirical analysis using US aggregate data 2 − → we use cross-state panel data over the period 1995-2010 to look at the effect of innovativeness on top income inequality. − → we use cross Commuting-zone data from Chetty et al (2015) to look at the effect of innovativeness on social mobility. Part 3: Empirical analysis using using individual data 3 − → we combine individual patenting with individual fiscal data to look at the social mobility of inventors versus non-inventors. () Innovation and Top Income Inequality RES - 31 March 2015 2 / 2

Innovation and Top Income Inequality Introduction Introduction Part 1 and Part 2 are drawn from Aghion-Akcigit-Bergeaud-Blundell-Hemous (2015) Part 3 is drawn from ongoing work by Aghion-Akcigit-Toivanen (2015) Philippe Aghion () Innovation and Top Income Inequality RES - 31 March 2015 5 / 48

Innovation and Top Income Inequality Philippe Aghion (Harvard) Ufuk Akcigit (UPenn) Antonin Bergeaud (Bank of France) Richard Blundell (UCL) David Hemous (INSEAD) RES - 31 March 2015 Philippe Aghion Innovation and Top Income Inequality RES - 31 March 2015

Innovation and Top Income Inequality Introduction Summary of Part 1 We develop a simple Schumpeterian growth model where: growth results from quality-improving innovations by incumbents or 1 from potential entrants. facilitating innovation 2 increases top income shares as top incomes are earned by innovators Philippe Aghion () Innovation and Top Income Inequality RES - 31 March 2015 6 / 48

Innovation and Top Income Inequality Introduction Summary of Part 1 We develop a simple Schumpeterian growth model where: growth results from quality-improving innovations by incumbents or 1 from potential entrants. facilitating innovation 2 increases top income shares as top incomes are earned by innovators spurs social mobility as innovation entails creative destruction Philippe Aghion () Innovation and Top Income Inequality RES - 31 March 2015 6 / 48

Innovation and Top Income Inequality Introduction Summary of Part 1 The model predicts: Innovation by entrants and/or incumbents increases top income 1 inequality; Innovation by entrants increases social mobility; 2 Entry barriers (e.g. from lobbying), lower the positive effects of 3 entrants’ innovations on top income inequality and social mobility. Philippe Aghion () Innovation and Top Income Inequality RES - 31 March 2015 7 / 48

Innovation and Top Income Inequality Introduction Summary of Part 2 Our main empirical findings from cross-state panel regressions: The top 1% income share is positively and significantly correlated with 1 the state’s degree of "innovativeness" This at least partly reflects a causal effect of innovation on top incomes 2 Innovativeness is less positively correlated with broader measures of 3 inequality. Philippe Aghion () Innovation and Top Income Inequality RES - 31 March 2015 8 / 48

Innovation and Top Income Inequality Introduction Summary of Part 2 From cross-section regressions performed at the CZ level: Innovativeness is positively correlated with upward social mobility 1 The positive effects of innovativeness on social mobility, is driven 2 mainly by entrant innovators and less so by incumbent innovators The positive effects of innovation on the top 1% income share and on 3 social mobility are both dampened in states with higher lobbying intensity Philippe Aghion () Innovation and Top Income Inequality RES - 31 March 2015 9 / 48

Innovation and Top Income Inequality Introduction Relationship with existing literature The analysis in this paper relates to several strands of literature on income inequality and growth Empirical literature on inequality and growth: Forbes (2000), Banerjee 1 and Duflo (2003), Frank (2009) Literature on skill-biased technical change: Katz and Murphy (1992), 2 Krusell, Ohanian, Ríos-Rull and Violante (2000), Goldin and Katz (2008), Acemoglu, (1998, 2002 and 2007) Literature on evolution of income and wealth inequality: Piketty and 3 Saez (2003), Gabaix and Landier (2008), Piketty (2014) Ongoing work on innovation and social mobility using individual data: 4 Toivanen and Vaananen (2014), Bell et al (2015) Philippe Aghion () Innovation and Top Income Inequality RES - 31 March 2015 10 / 48

Innovation and Top Income Inequality Introduction Outline Introduction Part 1: Model Part 2: Empirical analysis using US aggregate data Part 3: Empirical analysis using individual data Conclusion () Innovation and Top Income Inequality RES - 31 March 2015 2 / 18

Innovation and Top Income Inequality Part 1: Model Model Population Discrete time; continuum of individuals of measure 2: − → half are capital (firm) owners and the rest works as production workers Each individual lives only for one period Every period, a new generation of individuals is born and individuals that are born to current firm owners inherit the firm from their parents The rest of the population works in production unless they successfully innovate and replace incumbents’ children. () Innovation and Top Income Inequality RES - 31 March 2015 3 / 18

Innovation and Top Income Inequality Part 1: Model Model Production A final good is produced according to: � 1 ln Y t = 0 ln y it di Each intermediate is produced with a linear production function y it = q it l it () Innovation and Top Income Inequality RES - 31 March 2015 4 / 18

Innovation and Top Income Inequality Part 1: Model Model Innovation When there is a new innovation in any sector i : q i , t + 1 = η H q i , t . If there is no new innovation in sector i in period t + 1 , the incumbent’s technological lead shrinks to η L where η L < η H . If there is a new innovation in sector i , the previous technology becomes fully available to every firm in the economy, therefore the technological lead remains η H . An incumbent can use lobbying to prevent entry by an innovator → Lobbying is successful with probability z , in which case, the innovation is not implemented. () Innovation and Top Income Inequality RES - 31 March 2015 5 / 18

Innovation and Top Income Inequality Part 1: Model Model R&D technology By spending x 2 C J , t ( x ) = θ J 2 Y t an incumbent ( J = I ) or entrant ( J = E ) can innovate with probability x . () Innovation and Top Income Inequality RES - 31 March 2015 6 / 18