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

  • Volker Grossmann

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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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2003/wp-cesifo-2003-08/cesifo1_wp1003.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1003.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_1003
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  1. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug..
  2. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  3. 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.
  4. Timothy F. Bresnahan, 1997. "Computerization and Wage Dispersion: An Analytical Reinterpretation," Working Papers 97031, Stanford University, Department of Economics.
  5. 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.
  6. Charles I. Jones, 1999. "Growth: With or Without Scale Effects?," American Economic Review, American Economic Association, vol. 89(2), pages 139-144, May.
  7. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-51, March.
  8. Maria J. Alvarez-Pelaez & Christian Groth, 2002. "Too little or too much R&D?," Discussion Papers 02-01, University of Copenhagen. Department of Economics.
  9. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  10. Athey, S., 1996. "Characterizing Properties of Stochastic Objective Functions," Working papers 96-1, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. Skaperdas, Stergios, 1996. "Contest Success Functions," Economic Theory, Springer, vol. 7(2), pages 283-90, February.
  12. Shaked, Avner & Sutton, John, 1987. "Product Differentiation and Industrial Structure," Journal of Industrial Economics, Wiley Blackwell, vol. 36(2), pages 131-46, December.
  13. 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.
  14. 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.
  15. Alwyn Young, 1998. "Growth without Scale Effects," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 41-63, February.
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