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Growth Without Scale Effects

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  • Alwyn Young
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    Abstract

    An increase in the size (scale) of an economy increases the total quantity of rents that can be captured by successful innovators which, in equilibrium, should lead to a rise in innovative activity. Conventional wisdom and the theoretical predictions of models of endogenous innovation suggest that this increased research effort should lead to more rapid growth. As noted by Jones [1993], this prediction is at odds with the postwar experience of the OECD, where the growth of the market has indeed led to an increased R&D effort which, however, has been translated into stagnant or declining growth rates. Drawing upon the remarkable insights of the museum curator S.C. Gilfillan [1935], this paper modifies models of endogenous innovation to allow for the possibility that a rise in the profitability of innovative activity could lead to an increased variety of differentiated solutions to similar problems. An increased variety of technologies (e.g. an increase in the number and types of contraceptives) will increase the level of utility of the average consumer. If, however, continued improvement of this increased variety of technologies requires increased research input, a rise in the scale of the market could raise the equilibrium quantity of R&D, without increasing the economy's growth rate. Furthermore, increased product variety, brought about by increases in market size, might reduce the returns to improving product quality, paradoxically lowering an economy's growth rate while increasing the total resources devoted to R&D.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5211.

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    Date of creation: Aug 1995
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    Publication status: published as Journal of Political Economy, Vol.106 (Feb.1998), no.1, pp.41-63.
    Handle: RePEc:nbr:nberwo:5211

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    1. Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," Working papers 527, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. Gene M. Grossman & Elhanan Helpman, 1988. "Product Development and International Trade," NBER Working Papers 2540, National Bureau of Economic Research, Inc.
    3. Young, Alwyn, 1991. "Learning by Doing and the Dynamic Effects of International Trade," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 369-405, May.
    4. Robert J. Barro & Paul M. Romer, 1991. "Economic Growth," NBER Books, National Bureau of Economic Research, Inc, number barr91-1, May.
      • Robert J. Barro & Paul Romer, 1993. "Economic Growth," NBER Books, National Bureau of Economic Research, Inc, number barr93-1, May.
    5. Backus, David K. & Kehoe, Patrick J. & Kehoe, Timothy J., 1992. "In search of scale effects in trade and growth," Journal of Economic Theory, Elsevier, vol. 58(2), pages 377-409, December.
    6. repec:fth:stanho:e-92-3 is not listed on IDEAS
    7. Kiminori Matsuyama, 1990. "Agricultural Productivity, Comparative Advantage, and Economic Growth," Discussion Papers 934, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    8. 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.
    9. Alwyn Young, 1991. "Learning by Doing and the Dynamic Effects of International Trade," NBER Working Papers 3577, National Bureau of Economic Research, Inc.
    10. 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.
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    13. Zvi Griliches, 1989. "Patents: Recent Trends and Puzzles," NBER Working Papers 2922, National Bureau of Economic Research, Inc.
    14. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June.
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    19. Kortum, Samuel, 1993. "Equilibrium R&D and the Patent-R&D Ratio: U.S. Evidence," American Economic Review, American Economic Association, vol. 83(2), pages 450-57, May.
    20. Larry E. Jones & Rodolfo Manuelli, 1990. "A Convex Model of Equilibrium Growth," NBER Working Papers 3241, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Baldwin, Richard E. & Forslid, Rikard, 1999. "Incremental trade policy and endogenous growth:: A q-theory approach," Journal of Economic Dynamics and Control, Elsevier, vol. 23(5-6), pages 797-822, April.
    2. Peretto, Pietro & Smulders, Sjak, 1998. "Specialization, Knowledge Dilution, and Scale Effects in an IO-Based Growth Model," Working Papers 98-07, Duke University, Department of Economics.
    3. Vanhoudt, Patrick, 1998. "Did the European Unification Induce Economic Growth? In Search of Scale-Effects and Persistent Changes," Working Paper Series in Economics and Finance 270, Stockholm School of Economics.
    4. Fung, Ka Wai Terence & Lau, Chi Keung Marco & Chan, Kwok Ho, 2013. "A R&D Based Real Business Cycle Model," MPRA Paper 52571, University Library of Munich, Germany.
    5. Zoltan J. Acs & Bo Carlsson & Pontus Braunerhjelm & David B. Audretsch, . "The Missing Link," Papers on Entrepreneurship, Growth and Public Policy 2005-08, Max Planck Institute of Economics, Entrepreneurship, Growth and Public Policy Group.
    6. Dinopoulos, Elias & Segerstrom, Paul, 1999. "The dynamic effects of contingent tariffs," Journal of International Economics, Elsevier, vol. 47(1), pages 191-222, February.
    7. Boyan Jovanovic, 1995. "Learning and Growth," NBER Working Papers 5383, National Bureau of Economic Research, Inc.
    8. Dinopoulos, Elias & Syropoulos, Constantinos, 1997. "Tariffs and Schumpeterian growth," Journal of International Economics, Elsevier, vol. 42(3-4), pages 425-452, May.
    9. Diao, Xinshen & Roe, Terry L., 1996. "A Dynamic CGE Model of R&D Based Growth in the U.S. Economy: An Experiment Using the New Growth Theory," 1996: Implications of the New Growth Theory to Agricultural Trade Research and Trade Policy Conference, December 1996, Washington DC 50866, International Agricultural Trade Research Consortium.

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