Growth Without Scale EffectsAn increase in the size (scale) of an economy increases the total quantity of rents that can be captured by successful innovators which, in equilibrium, should lead to a rise in innovative activity. Conventional wisdom and the theoretical predictions of models of endogenous innovation suggest that this increased research effort should lead to more rapid growth. As noted by Jones [1993], this prediction is at odds with the postwar experience of the OECD, where the growth of the market has indeed led to an increased R & D effort which, however, has been translated into stagnant or declining growth rates. Drawing upon the remarkable insights of the museum curator S.C. Gilfillan [1935], this paper modifies models of endogenous innovation to allow for the possibility that a rise in the profitability of innovative activity could lead to an increased variety of differentiated solutions to similar problems. An increased variety of technologies (e.g. an increase in the number and types of contraceptives) will increase the level of utility of the average consumer. If, however, continued improvement of this increased variety of technologies requires increased research input, a rise in the scale of the market could raise the equilibrium quantity of R & D, without increasing the economy's growth rate. Furthermore, increased product variety, brought about by increases in market size, might reduce the returns to improving product quality, paradoxically lowering an economy's growth rate while increasing the total resources devoted to R & D. |
Common terms and phrases
capital service producers consumer expenditure consumer surplus degree of product degree of variety demand with respect downward sloping economy economy's growth rate elasticity of demand endogenous innovation equal equation factors of production final goods output fixed cost free entry relation Gilfillan given Grossman and Helpman increase in market increased variety innovative activity intermediate input intersection intertemporal spillover investment Jones L-Nfe level of utility long run growth manufacturing labour marginal cost market equilibrium models of endogenous monopolistically competitive Nash equilibrium NBER Working Papers non-rivalrous number of entrants number of varieties numeraire OECD order condition partial equilibrium period t-1 pool of rents product improvement product quality improvement product variety proportional tax QN curve QN relation quality ladders rate of product rates of innovation research cost respect to product rise Salop model social optimum social planner symmetric equilibrium technologies type of scale unit circle unit labour requirement variables zero