Global Poverty Reduction and Pareto-Improving Redistribution

Can a transfer of wealth from the US to developing countries be Pareto improving? We analyze this question in an open-economy innovation-driven growth model, in which the highincome (low-income) country produces innovative (homogenous) goods. We find that wealth redistribution to the low-income country simultaneously reduces global inequality and stimulates innovation through an increase in labor supply in the high-income country. Given that the market equilibrium is usually inefficient due to R&D externalities, the wealth redistribution may lead to a Pareto improvement, which occurs if the discount rate is sufficiently low or R&D productivity is sufficiently high.