r&d – based models of economic growth. r&d based models virtually all r&d based models...
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R&D – Based Models of Economic Growth
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R&D based models
• Virtually all R&D based models share a prediction of ”scale effects”
• This prediction is not supported by empirics
• This article comes up with suggestions for an alternative R&D based model
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Setting up the normal model
(1)
(2)
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Arguments against this model
• The size of labour force has grown dramatically over the last 25-100 years, but average growth rate has been relative constant!
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Arguments against this model
• Another way to introduce R&D in the model so that it doesn’t impose scale effects could be:
• But this is not consistent with the micrfoundations for R&D models developed by Romer et al.
• Also it imposes that an economy with one unit of labour can produce as much TFP-growth as 1 million units of labour.
(3)
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Arguments against this model
• Also empirics doesn’t support eq. (3)
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R&D based models are still very appealing
• R&D based models presented in the literature can are all easely rejected as mentioned above.
• However they share an intuitive appeal:– Growth arises as a result of intentional innovation by
rational, profit-maximizing agents and the models have strong microfoundations.
• We therefore would like to maintain the basic structure, while eliminating the “scale effect.”
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Introducing a new model
• Simplest way that innivations evolve:
• We can then put restrictions on the arrival rate of new ideas:
• And finally that overlap of research reduce the total number of innovations so that rather than belongs in the R&D equation. Inserting this and (4) and (5) gives:
(4)
(5)
(6)
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The decentralized economy
• Three sectors:1. A final goods sector that uses labour and
producer durables
2. An intermediate-goods sector of monopolists transforming capital into producer durables using designs discovered by the third sector.
3. The R&D sector.
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The decentralized economy
Growth in the stock og knowledge:
Differentiating both sides of (7) we can solve explicitly for the balanced growth path:
The growth now depends on the population growth rate and not on the population stock.
(7)
(8)
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The decentralized economy
• The share of labour in the decentralized economy:
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The social planner
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The social planner
• Setting up the usual Hamiltonian ans solving this program reveal that the growth in steady state is given once again by:
• And the amount of labour devoted to the R&D is:
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Transition effects in the model
Where and
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Transition effects in the model
• (19) and (20) are nonlinear, but linearizing around its steady state yields:
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Transition effects in the model
• The article then argues that even though the impact from changes in R&D doesn’t last forever, they can still be of great importance in the transition period.
• It is of importance, both in the case of over- versus underinvestment to obtain empirically plausible parameter values of λ and .
• Several other articles conclude that it is difficult to separately identify the effects from λ and .
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Conclusion
• The paper starts with a strong prediction of R&D based models, which exhibits intertemporal scale effects.
• The “semi-endogenous” R&D based model proposed by the paper is more consistent with empirical findings. – It does (unlike the AK-style and the R&D based models
mentioned) predict that the growth rate is determined by parameters that are typically invariant to policy manipulation.
– As in the Solow model, subsidies to R&D and to capital-accumulation have no long run effects, but only affect the transition path.
– But unlike the Solow-model, this model is endogenous in the sense that it derives from the pursuit of new technologies by rational, profit-maximizing agents.
– The model provides a well defined answer to the question, Why do economies exhibit sustained per capita income growth?