The spillover effects of top-income inequality on innovation

Abstract

The existing literature has widely explored the impact of technological change on income inequality. The reverse relationship – from income inequality to innovation – has received considerably less attention. This paper contributes to fill this gap by advancing and testing the hypothesis that higher levels of top-income inequality enhance innovation and entrepreneurship. Our empirical analysis confirms that top-income inequality increases the formation of new establishments and startups across USA cities over the past two decades. Moreover, higher top-income inequality is associated with a greater proportion of new high-tech and high-growth firms. We support these findings by showing that households in the top-tail of the income distribution keep larger shares of risk assets, exhibit a greater propensity to save, and display higher levels of propensity to risk. JEL classification: D31, D63, G24, L26, O33.