Abstract
In their seminal study on Innovation and Growth in the Global Economy, Grossman/Helpman (1991a) present a framework in which the pace of economic growth is determined by the intentional investment of forward-looking, profit-seeking entrepreneurs that act on imperfectly competitive markets. Together with Romer (1990), Grossman/Helpmanās contribution has certainly been most influential in originating the strand of endogenous growth with monopolistic competition.
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References
Cf. Grossman/Helpman (1991a, ch. 3). The EPV model shares many similarities with the models presented in Romer (1990), and Barro/Sala-i-Martin (1995, ch. 6).
Taking up the Dixit/Stiglitz (1977) specification of imperfect competition, we follow Ethier (1982) who interpreted the differentiated products as intermediate goods.
By an appropriate choice of units of measuring social knowledge capital, the factor of proportionality may be set to one. With respect to the intertemporal R&D spillover, Grossman/Helpman (1991a) suggest two kinds of generalizations. First, they investigate a model with a nonlinear relationship between private R&D investment and social knowledge capital. They formulate a function S t = f(A t ), with fā²(A t )> 0. The resulting model encompasses the present EPV model as a special case when f(A t ) = A t . It is shown that a linear accumulation of social knowledge capital is not a necessary condition for balanced growth [Grossman/Helpman (1991a), pp. 75ā78]. Second, Grossman/Helpman extend the EPV model by allowing for lags in the dissemination of knowledge. They find that the long-run growth rate of an economy with dissemination lags is lower than the long-run growth rate of an economy in which knowledge diffuses instantaneously. The findings of the EPV model are not affected by the introduction of dissemination lags, though [Grossman/Helpman (1991a), pp. 78ā81].
The infinitely lived individual may be interpreted as a family the generations of which are linked to each other through bequests [cf. Barro (1974)].
Flow budget constraint (3.23) and condition (3.24) yield an intertemporal budget constraint: the present value of consumption is equal to total wealth, which is the sum of initially held assets q 0 , and the present value of labor income [cf. Blanchard/Fischer (1989), p. 50].
For Ļ = 1, consumption growth rate (3.37) is equivalent to the laissez-faire steady-state innovation rate that Grossman/Helpman derive [1991a, p. 61]. Notice that there, the analysis is restricted to a logarithmic instantaneous utility function, i.e. Ļ = 1. The relation between consumption growth rate Ī³ and innovation rate Ī³ A is given by Ī³ = [1 - Ī±] Ī³ A/Ī± [cf. production function (3.2)].
Social plannerās allocation of labor is not biased as can be seen from the fact that the social technical knowledge effect is considered in both equations (3.38) and (3.39). This result is opposed to the laissez-faire outcome. Firms do not consider the external effect of their R&D efforts. Hence, the laissez-faire allocation of labor is biased towards production, i.e. towards todayās consumption.
For Ļ = 1, consumption growth rate (3.40) is equivalent to the social optimum steady-state innovation rate that Grossman/Helpman derive [1991a, p. 71].
Cf. Grossman/Helpman (1991a), p. 73.
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Hornung, D. (2002). Expanding Product Variety. In: Investment, R&D, and Long-Run Growth. Lecture Notes in Economics and Mathematical Systems, vol 509. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-51718-1_4
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DOI: https://doi.org/10.1007/978-3-642-51718-1_4
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