Too Much of a Good Thing? The Quantitative Economics of R&D-driven Growth Revisited

This article augments an R&D-based growth model of the third generation with human capital accumulation and impure altruism, calibrates it with U.S. data, and investigates whether the market provides too little or too much R&D. For benchmark parameters, the market share of employment in R&D is close to the socially optimal solution. Sensitivity analysis shows that the order of magnitude of possible deviation between market R&D and optimal R&D is also smaller than suggested by previous studies. Small deviation of total research effort, however, can be compatible with large sectoral misallocations. Furthermore, the model allows for two additional channels through which population growth may affect the resource allocation so that its overall economic impact is no longer predetermined as positive. Numerical calibrations show that economic growth at the average rate in the U.S. over the last century can be consistent with a small and probably negative partial correlation between population growth and economic growth. Copyright The editors of the "Scandinavian Journal of Economics" 2007 .