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Quality Improvements in Models of Growth

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  • Barro, Robert J.
  • Sala-i-Martin, Xavier

Abstract

Technological progress takes the form of improvements in the quality of an array of intermediate inputs to production. In an equilibrium that is standard in the literature, all research is carried out by outsiders, and success means that the outsider replaces the incumbent as the industry leader. The equilibrium research intensity involves three considerations: leading-edge goods are priced above the competitive level, innovators value the extraction of monopoly rents from predecessors, and innovators regard their successes as temporary. We show that if industry leaders have lower research costs, leaders will carry out all the research in equilibrium. If the cost advantage is not too large, however, the equilibrium research intensity and growth rate depend on the existence of the competitive fringe and take on the same values as in the standard solution. We discuss the departures from Pareto optimality and analyse the determination of the economy's rate of return and growth rate.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1076.

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Date of creation: Nov 1994
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Handle: RePEc:cpr:ceprdp:1076

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Keywords: Endogenous Growth; Innovation; Quality Ladders; Technological Progress;

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References

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  1. Reinganum, Jennifer F., 1989. "The timing of innovation: Research, development, and diffusion," Handbook of Industrial Organization, Elsevier, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 14, pages 849-908 Elsevier.
  2. Philippe Aghion & Peter Howitt, 1990. "A Model of Growth Through Creative Destruction," NBER Working Papers 3223, National Bureau of Economic Research, Inc.
  3. Ethier, Wilfred J, 1982. "National and International Returns to Scale in the Modern Theory of International Trade," American Economic Review, American Economic Association, vol. 72(3), pages 389-405, June.
  4. Young, Alwyn, 1993. "Substitution and Complementarity in Endogenous Innovation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(3), pages 775-807, August.
  5. Sergio Rebelo, 1999. "Long Run Policy Analysis and Long Run Growth," Levine's Working Paper Archive 2114, David K. Levine.
  6. Elise Brezis & Paul Krugman & Daniel Tsiddon, 1991. "Leapfrogging: A Theory of Cycles in National Technological Leadership," NBER Working Papers 3886, National Bureau of Economic Research, Inc.
  7. 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.
  8. Paul M Romer, 1999. "Endogenous Technological Change," Levine's Working Paper Archive 2135, David K. Levine.
  9. Spence, Michael, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 43(2), pages 217-35, June.
  10. Alwyn Young, 1993. "Substitution and Complementarity in Endogenous Innovation," NBER Working Papers 4256, National Bureau of Economic Research, Inc.
  11. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
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Cited by:
  1. Smolny, Werner, 1997. "Endogenous innovations in a model of the firm: Theory and empirical application for West-German manufacturing firms," Discussion Papers 39, University of Konstanz, Center for International Labor Economics (CILE).
  2. Piercarlo Zanchettin & Vincenzo Denicolò, 2009. "Leadership Cycles," Discussion Papers in Economics 09/25, Department of Economics, University of Leicester.

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