Quality Ladders and Excessive Growth

Abstract

In the present chapter, we set R&D’s exhaustion effect into a quality ladder framework. This permits to investigate comprehensively cases in which the laissez-faire growth rate is above the social optimum. In particular, we capture both the case of excessively slow growth [cf. chapter 4] and the case of excessively fast growth [cf. chapter 8] within one model. Moreover, compared to chapter 8’s model, the approach deviates in its representation of the stochastic nature of the innovation process. At the firm level, we assume that a higher level of research activity does not necessarily lead to more innovation, but increases the probability that innovation occurs. The structure of the model is shown by figure 9.1.