Is Inequality Good for Innovation?

Is inequality good for innovation? This article addresses this question, using aggregated microeconomic data for 102 regions over the period 1995-2000 from the European Community Household Panel (ECHP) data set, complemented with Eurostat's Regio data. Static and dynamic panel data specifications and Granger causality tests for panel data are used to assess the relationship between patents, included as a proxy for innovation and income inequality. The results indicate that, given existing levels of income inequality in European Union (EU), an increase in a region's inequality favors innovation. In addition, geographic space is a key factor in explaining the heterogeneous association between innovation and inequality, and innovation is characterized by circular, cumulative, and intraregional spillover effects. The above findings are robust to changes in the definition of income distribution and across inequality measurements.