On the Direction of Innovation

Francesco Squintani () and Hugo A. Hopenhayn
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Hugo A. Hopenhayn: University of California Los Angeles

No 1357, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: Research on the efficiency of innovation markets is usually concerned on whether the level of R&D firm investment is socially optimal. Instead, this paper studies whether R&D resources are employed optimally across research areas. Under weak assumptions, we find that competitive equilibrium innovative efforts are biased excessively into high returns areas. This form of market inefficiency is a novel result, and would take place even if innovators' profits coincided with the social value of innovations. We first demonstrate it in a simple, fundamental model. Then we embed our analysis in a canonical dynamic framework directly comparable with extant R&D models, and precisely identify the features of R&D competition that lead to the market failure we identify.

Date: 2016
New Economics Papers: this item is included in nep-com, nep-dge, nep-ino, nep-mic, nep-sbm and nep-tid
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:1357

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