Endogenous Growth and Technological Progress with Innovation Driven by Social Interactions

Abstract

We analyze the implications of innovation and social interactions on economic growth in a stylized endogenous growth model with heterogeneous research firms. A large number of research firms decide whether to innovate or not, by taking into account what competitors (i.e., other firms) do. This is due to the fact that their profits partly depend on an externality related to the share of firms which actively engage in research activities. Such a share of innovative firms also determines the evolution of technology in the macroeconomy, which ultimately drives economic growth. We show that when the externality effect is strong enough multiple BGP equilibria may exist. In such a framework, the economy may face a low growth trap suggesting that it may end up in a situation of slow long-run growth; however, such an outcome may be fully solved by government intervention. We also show that whenever multiple BGP exist, they are metastable meaning that the economy may cyclically fluctuate between the low and high BGP as a result of shocks affecting the individual behavior of research firms. Forthcoming in Economic Theory AbstractWe analyze the implications of innovation and social interactions on economic growth in a stylized endogenous growth model with heterogenous research firms. A large number of research firms decide whether to innovate or not, by taking into account what competitors (i.e., other firms) do. This is due to the fact that their profits partly depend on an externality related to the share of firms which actively engage in research activities. Such a share of innovative firms also determines the evolution of technology in the macroeconomy, which ultimately drives economic growth. We show that when the externality effect is strong enough multiple BGP equilibria may exist. In such a framework, the economy may face a low growth trap suggesting that it may end up in a situation of slow long run growth; however, such an outcome may be fully solved by government intervention. We also show that whenever multiple BGP exist, they are metastable meaning that the economy may cyclically fluctuate between the low and high BGP as a result of shocks affecting the individual behavior of research firms.

Patent Protection, Optimal Licensing, and Innovation With Endogenous Entry

“…Intuitively, aV > w means that R&D is a profitable investment for all licensees. Conversely, aV > w holds when R = 1 because the free-entry condition for innovative licensee (16) is binding while (15) is not.…”

“…Second, suppose that the innovator chooses a licensing fee in aV − w < F ≤ [1 − 1/(λχ)] 2 + aV − w. Then, from (13), (16), and the proof of Lemma 1, the entry decision of licensees given m and F is summarized as follows:…”

“…Marsiglio and Tolotti (2015) andHorii and Iwaisako (2007) also consider a binary choice of research.…”

Motivation crowding‐out and green‐paradox‐like outcomes

“…Clearly, a higher number of adopters of the green technology will decrease aggregate emissions, allowing for a reduction in ecological footprints to effectively occur. As discussed in the literature on social interactions (see Blume & Durlauf, 2003;Marsiglio & Tolotti, 2018), the households' optimization in (1) gives rise to a dynamic probabilistic choice model in which each agent is characterized by a time-varying likelihood to adopt the new technology. In particular, by considering the net benefit b c − , the social externality J , and the green share x t N , at any time t household i will decide to adopt with probability 5 :…”

“…households (see Marsiglio & Tolotti, 2018, for a comparison of the deterministic and stochastic versions of a similar random utility model). For the sake of simplicity we assume that the distribution of household types is uniform, and this allows us to describe the dynamics of the green share through a simple differential equation.…”