Innovation, inequality and a golden rule for growth in an economy with Cobb-Douglas function and an R&D sector

Paul Welfens

International Economics and Economic Policy, 2015, vol. 12, issue 4, 469-496

Abstract: The innovative approach presented introduces a modified neoclassical growth model which includes a new bias of technological progress in a quasi-endogenous growth model in which part of labor is used in the research & development sector. The combination of a macroeconomic production function and a new progress function, plus the assumption that the output elasticity of capital is positively influenced by the size of the R&D sector, sheds new light on innovation and growth as well as income inequality: Thus there is a new approach for explaining Piketty’s historical findings of a medium term rise of the capital income share in industrialized countries – both in the earlier and later part of the 19th century and in 1990–2010. A rising share of capital income can be explained within this approach by the increase in the output elasticity of capital, which has been developed in a new way, namely in the context of R&D. In the approach presented herein, the golden rule issues are also highlighted and it is shown that choosing the right size of the R&D sector will bring about maximum sustainable per capita consumption. While the basic new model is presented for the case of a closed economy, one could easily accommodate both trade and foreign direct investment and thereby get a better understanding of complex international investment, trade and FDI dynamics – including with respect to the envisaged Transatlantic Trade and Investment Partnership. Copyright Springer-Verlag Berlin Heidelberg 2015

Keywords: Innovation; Growth; Inequality; Golden rule; Piketty; O11; O32; O40; D63 (search for similar items in EconPapers)
Date: 2015
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Working Paper: Innovation, Inequality and a Golden Rule for Growth in an Economy with Cobb-Douglas Function and an R&D Sector (2015)
Working Paper: Innovation, Inequality and a Golden Rule for Growth in an Economy with Cobb-Douglas Function and an R&D Sector (2015)
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DOI: 10.1007/s10368-015-0314-2

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