A Model of Quality Ladders with Horizontal Entry

Pedro Gil, Paulo Brito () and Oscar Afonso

FEP Working Papers from Universidade do Porto, Faculdade de Economia do Porto

Abstract: We develop a multi-sector model of R&D-driven endogenous growth that merges the expanding-variety with the quality-ladders mechanism. The mechanism of expanding variety provides the flow of new firms (new product lines), whilst the mechanism of quality ladders provides the accumulation of non-physical capital (technological knowledge). The aim is to explore the view that, from the perspective of the households, wealth can be accumulated either by creating new firms or by accumulating capital, in a setting with no population growth. Differently from the standard expanding-variety literature, we allow for entry as well as exit of product lines from the market, view the creation of new product lines as a product development activity without positive spillovers, and postulate an horizontal entry mechanism that takes explicitly into account dynamic second-order effects. We perform a detailed comparative steady-state analysis and characterise qualitatively the local dynamics properties in a neighbourhood of the interior balanced-growth equilibrium. The model produces specific results with respect to the impact of changes in the entry-cost parameters and the fiscal-policy variables both in the aggregate growth rate and in the market structure and industry dynamics in steady state. We also conclude that the transitional dynamics is characterised by a catching-up effect, with an empirically reasonable speed of convergence under standard calibration.

Keywords: endogenous growth; firm dynamics; transitional dynamics (search for similar items in EconPapers)
JEL-codes: C62 D92 O41 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2008-10
New Economics Papers: this item is included in nep-com, nep-dge and nep-ent
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:por:fepwps:296

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