Optimal Growth Though Product Innovation
AbstractIn Lentz and Mortensen (2005) we formulate and estimate a market equilibrium model of endogenous growth through product innovation in the spirit of Klette and Kortum (2004). In this paper, we provide a quantitative solution to the plannerâ€™s problem in the modeled environment. We find that the optimal growth rate is much larger than the market equilibrium. Furthermore, unlike the market equilibrium in which all firm types invest in R&D, a planner would only allow investment by those that create products of the highest quality. These findings are a consequence of the fact that the value of the spill over effect of an innovation today on the productivity of future products is not fully captured by an innovator in the market equilibrium and the fact that the value of the spill over offsets the value of the expected product that it replaced only if it is of the highest quality. References: Grossman, G. and E. Helpman (1991). Innovation and Growth in the Global Economy. Cambridge, Ma: MIT Press. Lentz, R., and D.T. Mortensen (2005) â€œAn Empirical Model of Productivity Growth Though Product Innovation.â€ IZA Discussion Paper #1685 and NBER Working Paper #111546.
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 279.
Date of creation: 03 Dec 2006
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Optimal growth; plannerâ€™s problem; product innovation; innovation spill overs; creative-destruction externality.;
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- E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
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