The Effects of Consumption Externalities in An Innovation-Driven Growth Model

We examine how consumption externalities affect R&D activities by using a simple innovation-driven growth model where the sources of growth are both horizontal and vertical innovations. We show that if there are negative (positive) consumption externalities, the economy attains a higher (lower) variety expansion rate than the economy without consumption externalities, whereas the quality enhancement rate becomes lower (higher). If the elasticity of substitution between any two goods is high (low), the economy with positive consumption externalities tends to attain a higher (lower) output growth rate than the economy without consumption externalities.