Economic Stimulus Effects of Product Innovation Under Demand Stagnation

ABSTRACT When confronting economic stagnation, innovation (product innovation in particular) is often cited as an effective stimulus because it is assumed to encourage household consumption and lead to higher demand. Using a secular stagnation model with wealth preference, we examine the effects of product innovation on employment and consumption. This study examines three types of product innovation, including quantity‐augmenting‐like innovation, variety expansion, and addictive innovation. The first works as if a larger quantity were consumed although the actual quantity remains the same, the second increases the variety of consumption commodities, and the third reduces the elasticity of the marginal utility of consumption. We find that the first and second always reduce both consumption and employment, whereas the third can expand them. It suggests that policy makers should carefully choose the type of product innovation to promote as an economic stimulus: addictive innovation can stimulate business activity whereas quantity‐augmenting‐like innovation and variety expansion always worsen stagnation.