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The Engine of Growth


  • Federico Etro

    () (Department of Economics, University of Milan-Bicocca)


I develop a Schumpeterian model where the engine of growth is in the microeconomic structure of the patent races and derive new results on the determinants of growth. Under decreasing marginal productivity in the R&D sector, the equilibrium is characterized by small firms investing too little and the growth process is dynamically ine?cient; the optimal policy for innovation always implies R&D subsidies. When the incumbent monopolists are leaders in the patent races, they engage in large R&D investment and their persistent leadership enhances growth. Other sources of growth may reduce investment inducing a paradoxical negative correlation between growth and R&D spending even if innovations are the main engine of growth. In the open economy, growth is driven by the largest country and increases with its relative size and openness. In a monetary economy, price stickiness induces an inverted U relation between inflation and long run growth.

Suggested Citation

  • Federico Etro, 2006. "The Engine of Growth," Working Papers 100, University of Milano-Bicocca, Department of Economics, revised Oct 2006.
  • Handle: RePEc:mib:wpaper:100

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    Cited by:

    1. Federico Etro, 2006. "Political geography," Public Choice, Springer, vol. 127(3), pages 321-343, June.
    2. Federico Etro, 2006. "Market Leaders and Industrial Policy," Working Papers 103, University of Milano-Bicocca, Department of Economics, revised Nov 2006.
    3. Giammario Impullitti, 2007. "International Schumpeterian Competition and Optimal R&D subsidies," Economics Working Papers ECO2007/55, European University Institute.

    More about this item


    Growth; Innovation;

    JEL classification:

    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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