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Optimal Growth Though Product Innovation

Author

Listed:
  • Rasmus Lentz
  • Dale T. Mortensen

    (Department of Economics Northwestern University)

Abstract

In Lentz and Mortensen (2005) we formulate and estimate a market equilibrium model of endogenous growth through product innovation in the spirit of Klette and Kortum (2004). In this paper, we provide a quantitative solution to the planner’s problem in the modeled environment. We find that the optimal growth rate is much larger than the market equilibrium. Furthermore, unlike the market equilibrium in which all firm types invest in R&D, a planner would only allow investment by those that create products of the highest quality. These findings are a consequence of the fact that the value of the spill over effect of an innovation today on the productivity of future products is not fully captured by an innovator in the market equilibrium and the fact that the value of the spill over offsets the value of the expected product that it replaced only if it is of the highest quality. References: Grossman, G. and E. Helpman (1991). Innovation and Growth in the Global Economy. Cambridge, Ma: MIT Press. Lentz, R., and D.T. Mortensen (2005) “An Empirical Model of Productivity Growth Though Product Innovation.†IZA Discussion Paper #1685 and NBER Working Paper #111546.

Suggested Citation

  • Rasmus Lentz & Dale T. Mortensen, 2006. "Optimal Growth Though Product Innovation," 2006 Meeting Papers 279, Society for Economic Dynamics.
    • Handle: RePEc:red:sed006:279
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    References listed on IDEAS

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    1. repec:zbw:bofrdp:2013_022 is not listed on IDEAS
    2. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-351, March.
    3. Daron Acemoglu & Ufuk Akcigit & Harun Alp & Nicholas Bloom & William Kerr, 2018. "Innovation, Reallocation, and Growth," American Economic Review, American Economic Association, vol. 108(11), pages 3450-3491, November.
    4. Tor Jakob Klette & Samuel Kortum, 2004. "Innovating Firms and Aggregate Innovation," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 986-1018, October.
    5. Rasmus Lentz & Dale T. Mortensen, 2008. "An Empirical Model of Growth Through Product Innovation," Econometrica, Econometric Society, vol. 76(6), pages 1317-1373, November.
    6. Sigurd Mølster Galaasen & Alfonso Irarrazabal, 2016. "R&D heterogeneity and its implications for growth," Working Paper 2016/15, Norges Bank.
    7. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-1150, September.
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    Citations

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    Cited by:

    1. Guo, Lu & Yang, Wei, 2020. "The existence and uniqueness of the steady equilibrium in the endogenous economic growth model," MPRA Paper 100703, University Library of Munich, Germany.
    2. Christian Fons-Rosen & Pau Roldan-Blanco & Tom Schmitz, 2022. "The Effects of Startup Acquisitions on Innovation and Economic Growth," Working Papers 944, Queen Mary University of London, School of Economics and Finance.
    3. Galina Besstremyannaya & Richard Dasher & Sergei Golovan, 2018. "Growth through acquisition of innovations," Working Papers w0247, New Economic School (NES).
    4. Ilhan Guner, 2023. "Growth and Welfare Implications of Sector-Specific Innovations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 47, pages 204-245, January.
    5. Wan, Jing & Zhang, Jie, 2021. "Optimal growth through innovation, investment, and labor," European Economic Review, Elsevier, vol. 132(C).
    6. Galina Besstremyannaya & Richard Dasher & Sergei Golovan, 2019. "Growth through acquisition of innovations," Working Papers w0247, Center for Economic and Financial Research (CEFIR).
    7. Guido Menzio & Randall Wright, 2016. "Introduction to the Special Issue in Honor of Dale Mortensen," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 19, pages 1-3, January.

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    More about this item

    Keywords

    Optimal growth; planner’s problem; product innovation; innovation spill overs; creative-destruction externality.;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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