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Leaders and Followers: Perspectives on the Nordic Model and the Economics of Innovation

Joseph Stiglitz

No 20493, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper is an exercise in comparative institutional analysis, asking what kinds of arrangements most facilitate innovation. After identifying pervasive market failures in innovation, it explains why those associated with the Nordic model may be particularly conducive to innovation, and demonstrates that, in general, the optimal policies of the leader should differ from that of followers, but that both leaders and followers can benefit from active government policies (like industrial policies, public investments, and systems of social protection), not only leading to more innovation, but ensuring that more innovative activity is directed in ways that lead to the enhancement of living standards. It concludes by constructing a simple model in which knowledge flows slowly across national borders but moves easily within borders. We show there is a leadership-followership equilibrium, in which some countries are leaders, others are followers. Contrary to Solow's analysis, there need not be convergence. Focusing on technological progress that is a result of learning by doing, where learning occurs within the industrial sector but spills over to other sectors, we demonstrate the optimality of policies to expand the industrial sector beyond that which prevails in competitive equilibrium.

JEL-codes: E61 O3 O31 O32 O33 O34 O38 O51 O52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cse, nep-ino, nep-mac and nep-tid
Date: 2014-09
Note: PR
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Published as Stiglitz, Joseph E., 2015. "Leaders and followers: Perspectives on the Nordic model and the economics of innovation," Journal of Public Economics, Elsevier, vol. 127(C), pages 3-16.

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