The Effect of R&D Investments on Economic Inequality in Korea

Abstract

In this paper we examine the effects of R&D investments on economic inequality in Korea using a dynamic Computable General Equilibrium model. In the model, we classify the household sector into 10 income groups and the production sector into 28 industries. The policy simulation is designed to investigate the effect of R&D investments in 28 industries on income distribution during 2008-2030 period based on the assumption that the R&D investments follow the recent trend. The policy simulation uncovered the following findings: Firstly, R&D investments aggravate income distribution while they significantly improve most major economic variables such as GDP, investments, and consumption in a period from 2008-2030. Thus, there exists a trade-off between efficiency and equity aspects of R&D. We try to explain the reason why R&D investments aggravate income distribution and find it results from the relative distribution of capital income distribution to labor income distribution. Secondly, we examine the welfare effect of R&D investments based on the equivalent variation. As expected, R&D investments increased the welfare of upper-income households relative to lower-income ones. We find that those in the upper-income class bracket consume more R&D intensive goods than those classified as lower income, and furthermore, the prices of R&D intensive goods will probably decrease more due to R&D investments.