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A Schumpeterian Growth Model with Heterogenous Firms

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Author Info
Minniti, A.
Parello , C.
Segerstrom, P. S.

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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: (i) the innovation size is far from being identical across industries; and (ii) 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 set-up 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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13674.

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Date of creation: 2008
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Handle: RePEc:pra:mprapa:13674

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Related research
Keywords: Schumpeterian Growth; R&D; optimal policy;

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Find related papers by JEL classification:
L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
O38 - Economic Development, Technological Change, and Growth - - Technological Change - - - Government Policy
O31 - Economic Development, Technological Change, and Growth - - Technological Change - - - Innovation and Invention: Processes and Incentives
E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General

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