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A Model of Growth Through Creative Destruction

  • Aghion, Philippe
  • Howitt, Peter
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    A model of endogenous growth is developed in which vertical innovations, generated by a competitive research sector, constitute the underlying source of growth. Equilibrium is determined by a forward-looking difference equation, according to which the amount of research in any period depends upon the expected amount of research next period. One source of this intertemporal relationship is creative destruction. That is, the prospect of more future research discourages current research by threatening to destroy the rents created by current research. The paper analyzes the positive and normative properties of stationary equilibria, in which research employment is constant and GNP follows a random walk with drift, although under some circumstances cyclical equilibria also exist. Both the average growth rate and the variance of the growth rate are increasing functions of the size of innovations, the size of the skilled labor force, and the productivity of research as measured by a parameter indicating the effect of research on the Poisson arrival rate of innovations; and decreasing functions of the rate of time preference of the representative individual. Under laissez faire the economy's growth rate may be more or less than optimal because, in addition to the appropriability and intertemporal spillover effects of other endogenous growth models, which tend to make growth slower than optimal, the model also has effects that work in the opposite direction. In particular, the fact that private research firms do not internalize the destruction of rents generated by their innovations introduces a business-stealing effect similar to that found in the partial-equilibrium patent race literature. When we endogenize the size of innovations we find that business stealing also makes innovations too small.

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    File URL: http://dash.harvard.edu/bitstream/handle/1/12490578/A%20Model%20of%20Growth%20through%20Creative%20Destruction.pdf
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    Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 12490578.

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    Date of creation: 1992
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    Publication status: Published in Econometrica
    Handle: RePEc:hrv:faseco:12490578
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    1. Grandmont Jean-michel, 1983. "On endogenous competitive business cycles," CEPREMAP Working Papers (Couverture Orange) 8316, CEPREMAP.
    2. Raymond Deneckere & Kenneth Judd, 1986. "Cyclical and Chaotic Behavior in a Dynamic Equilibrium Model," Discussion Papers 734, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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    9. Judd, Kenneth L, 1985. "On the Performance of Patents," Econometrica, Econometric Society, vol. 53(3), pages 567-85, May.
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    11. Azariadis, Costas, 1981. "Self-fulfilling prophecies," Journal of Economic Theory, Elsevier, vol. 25(3), pages 380-396, December.
    12. 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.
    13. Shleifer, Andrei, 1986. "Implementation Cycles," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1163-90, December.
    14. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
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