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Competing process and quality innovation in a model of occupational choice

Author

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  • Colin Davis

    () (Kobe University, Graduate School of Economics)

  • Yasunobu Tomoda

    () (Kyoto University, Institute of Economic Research)

Abstract

We develop a simple model of endogenous growth and occupational choice in which skill differentiated workers choose between three types of employment activity: production, process innovation,and quality innovation. Incumbent firms invest in process innovation to reduce production costs and market entrants invest in quality improvements in order to capture the market from vintage product lines. We use this framework to examine innovation incentives for incumbent firms in an environment of creative destruction and find that there are two plausible and stable patterns of product evolution: a corner equilibrium with quality growth alone, and an interior equilibrium with both productivity growth and quality growth. We also show that the process innovation of an interior equilibrium has important policy implications for economic growth.

Suggested Citation

  • Colin Davis & Yasunobu Tomoda, 2009. "Competing process and quality innovation in a model of occupational choice," Discussion Papers 0915, Graduate School of Economics, Kobe University.
    • Handle: RePEc:koe:wpaper:0915
    as

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    File URL: http://www.econ.kobe-u.ac.jp/RePEc/koe/wpaper/2009/0915.pdf
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    References listed on IDEAS

    as
    1. Yeaple, Stephen Ross, 2005. "A simple model of firm heterogeneity, international trade, and wages," Journal of International Economics, Elsevier, vol. 65(1), pages 1-20, January.
    2. Gene M. Grossman & Elhanan Helpman, 1991. "Quality Ladders in the Theory of Growth," Review of Economic Studies, Oxford University Press, vol. 58(1), pages 43-61.
    3. Bottazzi, Laura & Peri, Giovanni, 2003. "Innovation and spillovers in regions: Evidence from European patent data," European Economic Review, Elsevier, vol. 47(4), pages 687-710, August.
    4. Pietro Peretto & Sjak Smulders, 2002. "Technological Distance, Growth And Scale Effects," Economic Journal, Royal Economic Society, vol. 112(481), pages 603-624, July.
    5. Alwyn Young, 1998. "Growth without Scale Effects," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 41-63, February.
    6. Peretto, Pietro F, 1996. "Sunk Costs, Market Structure, and Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(4), pages 895-923, November.
    7. A. D. Roy, 1951. "Some Thoughts On The Distribution Of Earnings," Oxford Economic Papers, Oxford University Press, vol. 3(2), pages 135-146.
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    Keywords

    Process innovation; Quality innovation; Endogenous growth; Occupational choice;

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