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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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    Cited by:

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    2. 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.
    3. Şeker, Murat & Ulu, Mehmet Fatih & Rodriguez-Delgado, Jose Daniel, 2024. "Imported intermediate goods and product innovation," Journal of International Economics, Elsevier, vol. 150(C).
    4. Galina Besstremyannaya & Richard Dasher & Sergei Golovan, 2018. "Growth through acquisition of innovations," Working Papers w0247, New Economic School (NES).
    5. 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.
    6. Giuseppe Berlingieri & Maarten De Ridder & Danial Lashkari & Davide Rigo, 2025. "Creative destruction through innovation bursts," CEP Discussion Papers dp2095, Centre for Economic Performance, LSE.
    7. Wan, Jing & Zhang, Jie, 2021. "Optimal growth through innovation, investment, and labor," European Economic Review, Elsevier, vol. 132(C).
    8. Fons-Rosen, Christian & Roldan-Blanco, Pau & Schmitz, Tom, 2022. "The Effects of Startup Acquisitions on Innovation and Economic Growth," CEPR Discussion Papers 17752, C.E.P.R. Discussion Papers.
    9. Galina Besstremyannaya & Richard Dasher & Sergei Golovan, 2019. "Growth through acquisition of innovations," Working Papers w0247, Center for Economic and Financial Research (CEFIR).
    10. 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.

    More about this item

    Keywords

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    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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