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Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 11
Innovation and Rent Protection in the Innovation and Rent Protection in the Theory of Schumpeterian GrowthTheory of Schumpeterian Growth
ByByElias DinopoulosElias Dinopoulos
Schumpeterian Growth TheorySchumpeterian Growth Theory
Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 22
OrganizationOrganization
This topic presents a state-of-the art growth model based on quality improvements.
The model generates endogenous long-run Schumpeterian growth without scale effects.
Readings Dinopoulos and Syropoulos (2007) Jones, Chapters 4 and 5. Dinopoulos and Thompson (1999)
Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 33
MotivationMotivation R&D investment occurs in an uncertain and
insecure environment. The rents from past innovations might be
captured through imitation or further innovation.
Incumbents may engage in activities that retard the pace of innovation by potential competitors.
These activities include: Trade secrecy distribution systems that exploit lead time increased product complexity various litigation mechanisms.
Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 44
Rent-protection mechanismsRent-protection mechanisms
The technological mechanismThe technological mechanism: Higher product complexity; trade secrecy
The legal mechanism:The legal mechanism: Effective monitoring and litigation
concerning possible patent infringement by challengers.
The political mechanism:The political mechanism: Lobbying politicians Bribing government officials in order to
restrict access to government services to potential competitors.
Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 55
DefinitionsDefinitions This paper introduces formally the concept of Rent
Protection Activities (RPAs) in the theory of Schumpeterian Growth.
Rent-protection activitiesRent-protection activities are costly (resource using) attempts by incumbents to delay the innovation success of challengers.
Schumpeterian GrowthSchumpeterian Growth is based on the introduction of new goods or processes (as opposed to physical or human capital accumulation).
Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 66
RPAs and removal of scale effectsRPAs and removal of scale effects
This paper proposes a new mechanism that removes the scale-effects property.
The mechanism is based on the notion of RPAs. We model the R&D difficulty, D(t), as an increasing
function of RPAs. R&D may may become more difficult over time because
incumbent firms may may allocate more resources to RPAs.
Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 77
RPAs and removal of scale effectsRPAs and removal of scale effects
The discovery process is modeled as an R&D R&D contestcontest (instead of an R&D race): Challengers spend resources on R&D
investments
Incumbents allocate resources to RPAs.
Both the levels of R&D and RPAs are chosen endogenously, and increase exponentially in the steady-state equilibrium.
Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 88
Preview of resultsPreview of results The model generates endogenous long-run
Schumpeterian growth without scale effects. Scale effects are removed from real income per
capita as well. Long-run growth is positively related to proportional
R&D subsidies and the rate of growth of population. Long run growth is closely related to income
distribution. Several steady-state properties and comparative
statics results are consistent with time series and international cross-sectional evidence.
Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 99
The model: An overviewThe model: An overview
A continuum of identical households with infinitely lived members. Each household is a dynastic family whose size
grows at the rate of population growth.
Population is partitioned into specialized and non specialized labor.
There is a continuum of structurally identical industries producing final consumption goods.
Innovation takes the form of higher quality products discovered through stochastic sequential R&D contests.
Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 1010
The model: An overviewThe model: An overview
Each industry has three activities that exhibit constant returns to scale.
Manufacturing of final goodsManufacturing of final goods This activity uses non-specialized labor.
Innovative R&D servicesInnovative R&D services This activity uses non-specialized labor.
Rent-protection activitiesRent-protection activities This activity uses only specialized labor.
Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 1111
The knowledge-creation processThe knowledge-creation process
There is a continuum of industries indexed by [0.1]
A challenger j that engages in innovative R&D discovers the next higher quality product with instantaneous probability:
),(
),(),(
tD
tRtI
j
j
Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 1212
The knowledge-creation processThe knowledge-creation process
),(
),(),(
tD
tRtI
We will refer to I(,t) as the effective R&D. Variable I(,t) is the intensity of the Poisson process that governs the arrival of innovations in industry .
The industry-wide probability of innovating is
Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 1313
The knowledge-creation processThe knowledge-creation process
The present paper assumes that the level of R&D difficulty is given by
),(),( tXtD
We also assume that population N(t) grows at a constant and exogenous rate gN > 0.
Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 1414
ProductionProduction
A firm that produces Z(,t) units of manufacturing output incurs the cost
),( tZwL RPA services are produced with specialized labor according to the following cost function
),( tXwH
Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 1515
Production and household behaviorProduction and household behavior
Firm j produces innovative R&D services using only non-specialized labor according to the cost function
),( tRw jL Each household maximizes its discounted utility
dttueeU ttg N )(log0
Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 1616
Household behaviorHousehold behavior
Per capita utility u(t) is defined by the following equation:
dtiZtui
i
)],,(log[)(log1
0
This a standard sub utility function used in quality-ladders growth models.
Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 1717
Household behaviorHousehold behavior
The solution to the consumer’s maximization problem yields:
)(
)()(),(
tp
tNtctZ
)()(
)(tr
tc
tcand
Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 1818
R&D contestsR&D contests The flow of profits for the incumbent
monopolist in a typical industry is given by
)()(
])([),,( tXwp
tcNwtptXp HL
Each challenger engages in R&D investment, R, and each incumbent engages only in RPAs, X(t).
The strategic interactions between incumbents and challengers are modeled as a stochastic stochastic differential gamedifferential game for Poisson jump processes.
Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 1919
Factor marketsFactor markets The full-employment condition for non-
specialized labor is
)()(
)()1( tRw
tcNtNs
L
)()( tXtsN
The full-employment condition for specialized labor is
Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 2020
Steady-state (balanced-growth) Steady-state (balanced-growth) equilibriumequilibrium
The following variables are constant over time Effective R&D, I; per capita consumption expenditure, c; wages of specialized and non-specialized labor, wH and
wL; long-run growth, gU.
Long-run real per capita income, u(t), and its growth rate, gU, are given by
,loglog]log[)(log tIw
ctu
L
log)(
)(I
tu
tug
U
Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 2121
Innovation and resource allocation.Innovation and resource allocation. The solution to the stochastic differential game yields the
following expression for the long-run rate of innovation rate of innovation ::
L
H
w
wI
)1(
Combining several equations yields the resource conditionresource condition
Isc
s
1
Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 2222
R&D ConditionR&D Condition
Solving for the interest rate from the zero-profit condition and using equation (10) yields the R&D condition (26)
Igs
c N 2)1(
)1(
The resource condition defines a negatively sloped line and the R&D condition defines a positively sloped line in the c, I space.
Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 2323
Figure 1: Steady-state equilibriumFigure 1: Steady-state equilibrium
c
0 I
E
I*
c*
R&D Condition
Resource Condition
Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 2424
Basic results of the analysisBasic results of the analysis
Proposition 1: There exists a unique steady-Proposition 1: There exists a unique steady-state equilibrium such that:state equilibrium such that:
Effective R&D, the relative wage of specialized Effective R&D, the relative wage of specialized labor, per capita IBA output, and per capita labor, per capita IBA output, and per capita consumption expenditure are all bounded and consumption expenditure are all bounded and constant over time.constant over time.
Long-run Schumpeterian growth is bounded and Long-run Schumpeterian growth is bounded and does not exhibit scale effects.does not exhibit scale effects.
The removal of scale effects is consistent with time-series evidence.
Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 2525
Comparative steady-state resultsComparative steady-state results
Proposition 2: Proposition 2: The long-run Schumpeterian growth The long-run Schumpeterian growth rate dependsrate depends
Positively on the proportional R&D subsidy rate, Positively on the proportional R&D subsidy rate, the population growth rate, and the size of the population growth rate, and the size of innovations;innovations;
Negatively on the fraction of specialized labor, Negatively on the fraction of specialized labor, the market interest rate, the unit labor the market interest rate, the unit labor requirement in the production of R&D services, requirement in the production of R&D services, and the productivity of RPAs.and the productivity of RPAs.
Proposition 3Proposition 3 compares the social and market rates of innovation.
Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 2626
Commercial versus University PatentingCommercial versus University Patenting
Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 2727
Commercial versus University PatentingCommercial versus University Patenting
Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 2828
Concluding remarksConcluding remarks The removal of scale effects from
Schumpeterian growth models is an important step in growth theory: It improves the empirical relevance of the new
growth theory. It increases the likelihood of integrating the
neoclassical and the new growth approach. It will increase our understanding of the
interactions between growth, income distribution and international market linkages.
The present paper contributes to these developments by highlighting the implications of RPAs.
Rent Protection, Rent Protection,
Innovation and GrowthInnovation and Growth Slide Slide 2929
Avenues for further researchAvenues for further research
The analysis suggests several avenues for further research: The transitional dynamics and welfare
properties of the model can be analyzed. A multi-country model might shed light on
the connection between comparative advantage, international technology transfer, growth and income differences across countries.
Introduction of endogenous patents and imitation-blocking activities is feasible and interesting.