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A Schumpeterian growth model with random quality improvements

Antonio Minniti (), Carmelo Parello () and Paul Segerstrom ()

Economic Theory, 2013, vol. 52, issue 2, 755-791

Abstract: A common assumption in the Schumpeterian growth literature is that the innovation size is constant and identical across industries. This is in contrast with the empirical evidence which shows that: (1) innovation size is not identical across industries and (2) the size distribution of profit returns from innovation is highly skewed toward the low value side, with a long tail on the high value side. In the present paper, we develop a Schumpeterian growth model that is consistent with this evidence. In particular, we assume that when a firm innovates, the size of its quality improvement is the result of a random draw from a Pareto distribution. This enables us to extend the class of quality-ladder growth models to encompass firm heterogeneity. We study the policy implications of this new setup numerically and find that it is optimal to heavily subsidize R&D for plausible parameter values. Although it is optimal to tax R&D for some parameter values, this case only occurs when the steady-state rate of economic growth is very low. Copyright Springer-Verlag 2013

Keywords: Schumpeterian growth; Heterogenous firms; R&D; Optimal policy; E10; L16; O31; O38 (search for similar items in EconPapers)
Date: 2013
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