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Quality Improvements in Models of Growth

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

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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  1. Spence, Michael, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Wiley Blackwell, vol. 43(2), pages 217-35, June.
  2. Philippe Aghion & Peter Howitt, 1990. "A Model of Growth Through Creative Destruction," NBER Working Papers 3223, National Bureau of Economic Research, Inc.
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  8. Reinganum, Jennifer F., 1989. "The timing of innovation: Research, development, and diffusion," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 14, pages 849-908 Elsevier.
  9. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  10. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S71-102, October.
  11. 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.
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