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Quality-improving horizontal innovations

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Abstract

We modify the growth model with horizontal innovations from Romer (1990) and Jones (1995) by assuming that researchers can determine the quality of the products they invent. Because research effort increases with product quality, the researchers face a tradeoff between the quantity and the quality of their innovations. We show (i) that every product is slowly but steadily driven out of the market by superior goods, (ii) that the model does not exhibit a strong scale effect, (iii) that the long-run growth rate of the economy is not policy-invariant but can be controlled by quality-contingent R&D subsidies, and (iv) that the optimal solution can be decentralized using a mix of production subsidies, R&D subsidies, and lump-sum taxation.

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  • Gerhard Sorger, 2006. "Quality-improving horizontal innovations," Vienna Economics Papers 0609, University of Vienna, Department of Economics.
    • Handle: RePEc:vie:viennp:0609
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    1. Jones, Charles I., 2005. "Growth and Ideas," Handbook of Economic Growth,in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 16, pages 1063-1111 Elsevier.
    2. Charles I. Jones, 2002. "Sources of U.S. Economic Growth in a World of Ideas," American Economic Review, American Economic Association, vol. 92(1), pages 220-239, March.
    3. Alvarez-Pelaez, Maria J. & Groth, Christian, 2005. "Too little or too much R&D?," European Economic Review, Elsevier, vol. 49(2), pages 437-456, February.
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    5. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-351, March.
    6. Gancia, Gino & Zilibotti, Fabrizio, 2005. "Horizontal Innovation in the Theory of Growth and Development," Handbook of Economic Growth,in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 3, pages 111-170 Elsevier.
    7. Aghion, Philippe & Howitt, Peter, 2005. "Growth with Quality-Improving Innovations: An Integrated Framework," Handbook of Economic Growth,in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 2, pages 67-110 Elsevier.
    8. Charles I. Jones & John C. Williams, 1998. "Measuring the Social Return to R&D," The Quarterly Journal of Economics, Oxford University Press, vol. 113(4), pages 1119-1135.
    9. Samuel S. Kortum, 1997. "Research, Patenting, and Technological Change," Econometrica, Econometric Society, vol. 65(6), pages 1389-1420, November.
    10. Benassy, Jean-Pascal, 1998. "Is there always too little research in endogenous growth with expanding product variety?," European Economic Review, Elsevier, vol. 42(1), pages 61-69, January.
    11. Peretto, Pietro F, 1998. "Technological Change and Population Growth," Journal of Economic Growth, Springer, vol. 3(4), pages 283-311, December.
    12. Alwyn Young, 1998. "Growth without Scale Effects," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 41-63, February.
    13. Segerstrom, Paul S, 1998. "Endogenous Growth without Scale Effects," American Economic Review, American Economic Association, vol. 88(5), pages 1290-1310, December.
    14. Jones, Charles I, 1995. "R&D-Based Models of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 759-784, August.
    15. Dinopoulos, Elias & Thompson, Peter, 1998. "Schumpeterian Growth without Scale Effects," Journal of Economic Growth, Springer, vol. 3(4), pages 313-335, December.
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