A Schumpeterian Model of Entrepreneurship, Innovation, and Regional Economic Growth

The authors provide the first theoretical analysis of a one-sector, discrete-time, Schumpeterian model of growth in a regional economy in which consumers are risk neutral, there is no population growth, monopolistic entrepreneurs produce intermediate goods, and a single consumption good is produced competitively. The authors' analysis generates several new results. In the deterministic model, R&D in time t surely leads to an innovation in time t + 1. In this setting, the authors show that relative to the balanced growth path (BGP) equilibrium, the social planner always allocates more labor to R&D and hence achieves a larger size of innovation and a higher growth rate. Next, in the stochastic model, R&D in time t probabilistically leads to an innovation in time t + 1. In this setting, the authors first define the equilibrium and the steady state BGP allocations. Second, the authors generalize the notion of the steady state and determine the number of unemployed workers. Third, the authors show that the regional economy experiences bursts of unemployment followed by periods of full employment. Finally, the authors show that a decline in the time discount rate increases the average growth rate and the average unemployment.