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Growth Without Scale Effects

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  • Alwyn Young

Abstract

An increase in the size (scale) of an economy increases the total quantity of rents that can be captured by successful innovators which, in equilibrium, should lead to a rise in innovative activity. Conventional wisdom and the theoretical predictions of models of endogenous innovation suggest that this increased research effort should lead to more rapid growth. As noted by Jones [1993], this prediction is at odds with the postwar experience of the OECD, where the growth of the market has indeed led to an increased R&D effort which, however, has been translated into stagnant or declining growth rates. Drawing upon the remarkable insights of the museum curator S.C. Gilfillan [1935], this paper modifies models of endogenous innovation to allow for the possibility that a rise in the profitability of innovative activity could lead to an increased variety of differentiated solutions to similar problems. An increased variety of technologies (e.g. an increase in the number and types of contraceptives) will increase the level of utility of the average consumer. If, however, continued improvement of this increased variety of technologies requires increased research input, a rise in the scale of the market could raise the equilibrium quantity of R&D, without increasing the economy's growth rate. Furthermore, increased product variety, brought about by increases in market size, might reduce the returns to improving product quality, paradoxically lowering an economy's growth rate while increasing the total resources devoted to R&D.

Suggested Citation

  • Alwyn Young, 1995. "Growth Without Scale Effects," NBER Working Papers 5211, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5211
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    Cited by:

    1. Patrick Vanhoudt, 1999. "Did the European unification induce economic growth? In search of scale effects and persistent changes," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 135(2), pages 193-220, June.
    2. Kenny, Charles & Williams, David, 2001. "What Do We Know About Economic Growth? Or, Why Don't We Know Very Much?," World Development, Elsevier, vol. 29(1), pages 1-22, January.
    3. Long, N.V. & Wong, K.Y., 1996. "Endogenous Growth and International Trade: A Survey," Working Papers 96-07, University of Washington, Department of Economics.
    4. Diao, Xinshen & Roe, Terry L., 1996. "A Dynamic CGE Model of R&D Based Growth in the U.S. Economy: An Experiment Using the New Growth Theory," 1996: Implications of the New Growth Theory to Agricultural Trade Research and Trade Policy Conference, December 1996, Washington DC 50866, International Agricultural Trade Research Consortium.
    5. Peretto, Pietro & Smulders, Sjak, 1998. "Specialization, Knowledge Dilution, and Scale Effects in an IO-Based Growth Model," Working Papers 98-07, Duke University, Department of Economics.
    6. Zoltan J. Acs & Bo Carlsson & Pontus Braunerhjelm & David B. Audretsch, "undated". "The Missing Link," Papers on Entrepreneurship, Growth and Public Policy 2005-08, Max Planck Institute of Economics, Entrepreneurship, Growth and Public Policy Group.
    7. Boyan Jovanovic, 1995. "Learning and Growth," NBER Working Papers 5383, National Bureau of Economic Research, Inc.
    8. Ka Wai Terence Fung & Chi Keung Marco Lau & Kwok Ho Chan, 2016. "An R&D-based real business cycle model," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 63(4), pages 327-358, December.
    9. Dinopoulos, Elias & Segerstrom, Paul, 1999. "The dynamic effects of contingent tariffs," Journal of International Economics, Elsevier, vol. 47(1), pages 191-222, February.
    10. Koichi Futagami & Yasushi Ohkusa, 2003. "The Quality Ladder and Product Variety: Larger Economies May Not Grow Faster," The Japanese Economic Review, Japanese Economic Association, vol. 54(3), pages 336-351.
    11. Klenow, Peter J., 1996. "Industry innovation: where and why," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 44(1), pages 125-150, June.
    12. Baldwin, Richard E. & Forslid, Rikard, 1999. "Incremental trade policy and endogenous growth:: A q-theory approach," Journal of Economic Dynamics and Control, Elsevier, vol. 23(5-6), pages 797-822, April.
    13. Dinopoulos, Elias & Syropoulos, Constantinos, 1997. "Tariffs and Schumpeterian growth," Journal of International Economics, Elsevier, vol. 42(3-4), pages 425-452, May.

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