A Theory of Entrepreneurial Rents in Endogenous Growth Mark Sanders Utrecht School of Economics Max Planck Institute of Economics IECER 7 March 2008 Regensburg

Motivation Schumpeter and Endogenous Growth Theory Innovation vs. Invention Who gets rents? Opportunities vs. Patents/Ideas The ultimate source of growth Growth and Ideas; the basic model structure Consumers Producers/Intermediates Innovation Growth Back to “Reality”: Knowledge Creation Knowledge Spillover Incentives and Rewards

Growth and Ideas Basic Structure: Consumers 1. Need to be willing to save 2. Need to have latent demand for innovations Basic Structure: Producers 1. Need to make profit 2. Need to demand factors

Growth and Ideas Basic Structure: Inventors/Innovators 1. Make zero-profit (free entry) 2. Need to demand R&D factors Auction off ideas at willingness to pay: Produce ideas according to:

Growth and Ideas Basic Structure: 1. Growth is positive for positive R&D 2. Sub-optimal in case of spillovers Intra-temporal knowledge spillovers Inter-temporal knowledge spillovers Positive steady state growth requires: latent demand for innovation imperfect competition appropriation of rents by inventors/innovators increasing returns to scale in aggregate production Optimal growth requires stimulation of R&D

Back to “Reality”: Knowledge Creation: Is all knowledge creation invention? Is all invention also innovation? Knowledge Spillovers: Are knowledge spillovers automatic? Are knowledge spillovers localized? Are knowledge spillovers costly? Incentives and Rewards: What drives knowledge creation? What drives invention? What drives innovation?

A Model (Acs and Sanders 2008) Producers of final good C Consumers of final good C Producers of n intermediate goods Capital Market Labor Market

A Model (Acs and Sanders 2008) Consumers (standard)

A Model (Acs and Sanders 2008) Final Goods Producers

A Model (Acs and Sanders 2008) Final Goods Producers (R&D)

A Model (Acs and Sanders 2007) Intermediate Goods Producers

A Model (Acs and Sanders 2007) Intermediate Goods Producers (Entry) Entry-Arbitrage:

A Model (Acs and Sanders 2008) Equilibrium in labor market:

A Model (Acs and Sanders 2008) Equilibrium A/n 1 A/n*

A Model (Acs and Sanders 2008) Equilibrium Steady State:

A Model (Acs and Sanders 2008) Features: Spillover R&D=>Entrepreneurs proportional Spillover Entrepreneurs=>R&D less than proportional Growth Sub-Optimal Both R&D and Entrepreneurs should be supported R&D more than Entrepreneurs Rents reward commercialization (not knowledge creation) Opportunity is pure spillover from (process) R&D Process R&D is self sustaining/financed Captures spin-out/off Captures entrepreneurship Captures up stream spillovers (how?) Captures downstream spillovers (how?)

A Model (Acs and Sanders 2008) In the tradition of Joseph Schumpeter we: …separate commercialization and invention, …allocate the monopoly rents to the entrepreneur, …assume opportunity to be a costless spillover/externality …but also endogenize knowledge creation. Innovation and Entrepreneurship should… …and can be put at the heart of growth theory.