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A Model of Quality Ladders with Horizontal Entry

Author

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  • Pedro Rui Mazeda Gil

    () (CEMPRE and Faculdade de Economia, Universidade do Porto)

  • Paulo Brito

    () (Instituto Superior de Economia e Gestão and UECE, Universidade Técnica de Lisboa)

  • Óscar Afonso

    () (CEMPRE and Faculdade de Economia, Universidade do Porto)

Abstract

We develop a multi-sector model of R&D-driven endogenous growth that merges the expanding-variety with the quality-ladders mechanism. The mechanism of expanding variety provides the flow of new firms (new product lines), whilst the mechanism of quality ladders provides the accumulation of non-physical capital (technological knowledge). The aim is to explore the view that, from the perspective of the households, wealth can be accumulated either by creating new firms or by accumulating capital, in a setting with no population growth. Differently from the standard expanding-variety literature, we allow for entry as well as exit of product lines from the market, view the creation of new product lines as a product development activity without positive spillovers, and postulate an horizontal entry mechanism that takes explicitly into account dynamic second-order effects. We perform a detailed comparative steady-state analysis and characterise qualitatively the local dynamics properties in a neighbourhood of the interior balanced-growth equilibrium. The model produces specific results with respect to the impact of changes in the entry-cost parameters and the fiscal-policy variables both in the aggregate growth rate and in the market structure and industry dynamics in steady state. We also conclude that the transitional dynamics is characterised by a catching-up effect, with an empirically reasonable speed of convergence under standard calibration.

Suggested Citation

  • Pedro Rui Mazeda Gil & Paulo Brito & Óscar Afonso, 2008. "A Model of Quality Ladders with Horizontal Entry," FEP Working Papers 296, Universidade do Porto, Faculdade de Economia do Porto.
  • Handle: RePEc:por:fepwps:296
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    Cited by:

    1. Pedro Rui Mazeda Gil, 2009. "Animal Spirits and the Composition of Innovation in a Lab-Equipment R&D Model," FEP Working Papers 336, Universidade do Porto, Faculdade de Economia do Porto.

    More about this item

    Keywords

    endogenous growth; firm dynamics; transitional dynamics;

    JEL classification:

    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium

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