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Contest for Attention in a Quality-Ladder Model of Endogenous Growth

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  • Volker Grossmann

Abstract

This paper develops a quality-ladder model of endogenous growth to study the interplay between in-house R&D and marketing expenditure. Although promotional activity is modelled as purely wasteful competition among firms for attention, it unambiguously fosters innovation activity of firms, and possibly, leads to faster growth. This result rests on two premises which are consistent with empirical evidence. First, if firms incur higher sunk costs for marketing, concentration and firm sizes rise. Second, firm size and R&D expenditure are positively related. As a result, R&D investments per firm may even become excessive, whereas being inefficiently low in the benchmark case without marketing. This has non-trivial consequences for the socially optimal policy design with respect to R&D subsidies and entry incentives.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1003.

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Date of creation: 2003
Date of revision:
Handle: RePEc:ces:ceswps:_1003

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Related research

Keywords: contest for attention; endogenous growth; innovation activity; marketing; R&D subsidies; scale effects;

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References

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  1. Bresnahan, Timothy F, 1999. "Computerisation and Wage Dispersion: An Analytical Reinterpretation," Economic Journal, Royal Economic Society, vol. 109(456), pages F390-415, June.
  2. Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," Working papers 527, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Charles I. Jones, . "Growth: With or Without Scale Effects?," Working Papers 99001, Stanford University, Department of Economics.
  4. Jones, Charles I & Williams, John C, 2000. " Too Much of a Good Thing? The Economics of Investment in R&D," Journal of Economic Growth, Springer, vol. 5(1), pages 65-85, March.
  5. Konishi, Hideki, 1990. "Final and intermediate goods taxation in an oligopolistic economy with free entry," Journal of Public Economics, Elsevier, vol. 42(3), pages 371-386, August.
  6. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  7. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  8. Shaked, Avner & Sutton, John, 1987. "Product Differentiation and Industrial Structure," Journal of Industrial Economics, Wiley Blackwell, vol. 36(2), pages 131-46, December.
  9. Alvarez-Pelaez, Maria J. & Groth, Christian, 2005. "Too little or too much R&D?," European Economic Review, Elsevier, vol. 49(2), pages 437-456, February.
  10. Stergios Skaperdas, 1996. "Contest success functions (*)," Economic Theory, Springer, vol. 7(2), pages 283-290.
  11. Cohen, Wesley M & Klepper, Steven, 1996. "Firm Size and the Nature of Innovation within Industries: The Case of Process and Product R&D," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 232-43, May.
  12. Alwyn Young, 1998. "Growth without Scale Effects," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 41-63, February.
  13. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug..
  14. Jones, Charles I, 1995. "R&D-Based Models of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 759-84, August.
  15. Athey, S., 1996. "Characterizing Properties of Stochastic Objective Functions," Working papers 96-1, Massachusetts Institute of Technology (MIT), Department of Economics.
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Cited by:
  1. Grossmann, Volker, 2007. "How to promote R&D-based growth? Public education expenditure on scientists and engineers versus R&D subsidies," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 891-911, December.
  2. Volker Grossmann, 2005. "White-collar employment, inequality, and technological change," Journal of Economics, Springer, vol. 86(1), pages 119-142, December.

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