TITLE

A Schumpeterian growth model with random quality improvements

AUTHOR(S)
Minniti, Antonio; Parello, Carmelo; Segerstrom, Paul
PUB. DATE
March 2013
SOURCE
Economic Theory;Mar2013, Vol. 52 Issue 2, p755
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
A common assumption in the Schumpeterian growth literature is that the innovation size is constant and identical across industries. This is in contrast with the empirical evidence which shows that: (1) innovation size is not identical across industries and (2) the size distribution of profit returns from innovation is highly skewed toward the low value side, with a long tail on the high value side. In the present paper, we develop a Schumpeterian growth model that is consistent with this evidence. In particular, we assume that when a firm innovates, the size of its quality improvement is the result of a random draw from a Pareto distribution. This enables us to extend the class of quality-ladder growth models to encompass firm heterogeneity. We study the policy implications of this new setup numerically and find that it is optimal to heavily subsidize R&D for plausible parameter values. Although it is optimal to tax R&D for some parameter values, this case only occurs when the steady-state rate of economic growth is very low.
ACCESSION #
86406863

 

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