Animal Spirits and the Composition of Innovation in a Lab-Equipment R&D Model with Transition
We revisit the issue of self-fulfilling "waves of enthusiasm" as stationary rational expectations equilibria in tournament models of horizontal and vertical R&D. By considering a lab-equipment specification, the model predicts a positive effect of animal spirits on the balanced-growth-path (BGP) level of per-capita consumption without impacting on economic growth and on aggregate vertical R&D. However, transition is slower under "waves of enthusiasm", implying a longer period in which growth rates are higher than the BGP level. An economy that is subject to expectations shocks then converges at a time-varying speed. On average over time, transition is longer but less "painful" – i.e., with higher per-capita consumption levels – than otherwise.
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