Capital and Interest in Horizontal Innovation Models
A typical horizontal innovation model has three sequentially connected sectors. I argue that this structure of the model necessitates the compounding of interest on an input that goes through multiple production periods before the final good is produced. This aspect is missed (or deliberately assumed away) in typical horizontal innovation models and I contend that this practice generates internal inconsistency in relation to the long run nature of the models. I propose the correction which will restore internal consistency and discuss its implications. Though discussion is carried out in particular reference to Barro and Sala-i-Martin's "labequipment" model, implications are general.
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- S. Illeris & G. Akehurst, 2002. "Introduction," The Service Industries Journal, Taylor & Francis Journals, vol. 22(1), pages 1-3, January.
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