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A Schumpeterian growth model with random quality improvements

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  • Antonio Minniti

    ()

  • Carmelo Parello

    ()

  • Paul Segerstrom

    ()

Abstract

A common assumption in the Schumpeterian growth literature is that the innovation size is constant and identical across industries. This is in contrast with the empirical evidence which shows that: (1) innovation size is not identical across industries and (2) the size distribution of profit returns from innovation is highly skewed toward the low value side, with a long tail on the high value side. In the present paper, we develop a Schumpeterian growth model that is consistent with this evidence. In particular, we assume that when a firm innovates, the size of its quality improvement is the result of a random draw from a Pareto distribution. This enables us to extend the class of quality-ladder growth models to encompass firm heterogeneity. We study the policy implications of this new setup numerically and find that it is optimal to heavily subsidize R&D for plausible parameter values. Although it is optimal to tax R&D for some parameter values, this case only occurs when the steady-state rate of economic growth is very low. Copyright Springer-Verlag 2013

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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 52 (2013)
Issue (Month): 2 (March)
Pages: 755-791

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Handle: RePEc:spr:joecth:v:52:y:2013:i:2:p:755-791

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Related research

Keywords: Schumpeterian growth; Heterogenous firms; R&D; Optimal policy; E10; L16; O31; O38;

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References

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Citations

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Cited by:
  1. Stadler, Manfred, 2013. "Scientific breakthroughs, innovation clusters and stochastic growth cycles," University of Tuebingen Working Papers in Economics and Finance 60, University of Tuebingen, Faculty of Economics and Social Sciences.
  2. Davin Chor & Edwin L.-C. Lai, 2013. "Cumulative Innovation, Growth and Welfare-Improving Patent Policy," CESifo Working Paper Series 4407, CESifo Group Munich.
  3. Edwin Lai, 2013. "Cumulative Innovation, Growth and Welfare-Improving Patent Policy," 2013 Meeting Papers 854, Society for Economic Dynamics.
  4. Viktor Slavtchev & Simon Wiederhold, 2012. "Technological Intensity of Government Demand and Innovation," Ifo Working Paper Series Ifo Working Paper No. 135, Ifo Institute for Economic Research at the University of Munich.

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