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Technological progress takes the form of improvements in the quality of an array of intermediate inputs to production. In an equilibrium that is standard in the literature, all research is carried out by outsiders, and success means that the outsider replaces the incumbent as the industry leader. The equilibrium research intensity involves three considerations: leading-edge goods are priced above the competitive level, innovators value the extraction of monopoly rents from predecessors, and innovators regard their successes as temporary. In Discussion Paper No. 1076, Robert Barro and Research Fellow Xavier Sala-i-Martin show that if industry leaders have lower research costs, leaders will carry out all the research in equilibrium. If the cost advantage is not too large, however, the equilibrium research intensity and growth rate depend on the existence of the competitive fringe and take on the same values as in the standard solution. The authors discuss departures from Pareto optimality and analyse the determination of the economy's rate of return and growth rate. The model's welfare conclusions are three. First, the decentralized rate of return and growth rate coincide with the social planner's choices if the effects of monopoly pricing are eliminated and if innovators are forced to compensate their immediate predecessor for the loss of monopoly rentals. Second, if the effects of monopoly pricing are eliminated, but no compensation is awarded to predecessors, the decentralized values exceed the social planner's values. Third, if there are no interventions, the decentralized values may be higher or lower than the social planner's values. Quality Improvements in Models of Growth Robert J Barro and Xavier Sala-i-Martin Discussion Paper No. 1076, November 1994 (IM) |