We analyze the effects of lobbying on growth and inequality in a novel directed technical change model, where firms producing different technologies can engage in either demand-seeking lobbying-aimed at increasing demand or rent-seeking lobbying-focused on extracting economic rents.

Demand-seeking lobbying promotes economic growth and, when goods are gross substitutes, also increases inequality. In contrast, rent-seeking lobbying has the opposite effects. We also develop a microfounded theoretical game that models generalized lobbying decisions. In this framework, firms from different sectors can either compete or collaborate in their lobbying efforts. The model reveals that lobbying incentives are stronger when fixed costs are low and when shared sources of lobbying efficiency outweigh sector-specific ones. Given our results, it is essential for policy to distinguish between rent-seeking and demand-seeking lobbying practices, and to design targeted incentives for each in order to effectively influence growth and inequality.

We develop an overlapping generations endogenous growth model with cash-in-advance constraints for (i) consumers and (ii) R&D firms which is consistent with an effect of inflation on the skill-premium labor share. Inflation decreases the skill premium in both cases and decreases the labor share through (i) which it increases through (ii). The newly described effect of inflation on the labor share is consistent with empirical evidence for a short-run effect.