1. R&D – Based Models of Economic Growth

2. R&D based models Virtually all R&D based models share a prediction of ”scale effects” This prediction is not supported by empirics This article comes up with suggestions for an alternative R&D based model

3. Setting up the normal model (1) (2)

4. Arguments against this model The size of labour force has grown dramatically over the last 25-100 years, but average growth rate has been relative constant!

5. Arguments against this model Another way to introduce R&D in the model so that it doesn’t impose scale effects could be: But this is not consistent with the micrfoundations for R&D models developed by Romer et al. Also it imposes that an economy with one unit of labour can produce as much TFP-growth as 1 million units of labour. (3)

6. Arguments against this model Also empirics doesn’t support eq. (3)

7. R&D based models are still very appealing R&D based models presented in the literature can are all easely rejected as mentioned above. However they share an intuitive appeal: –Growth arises as a result of intentional innovation by rational, profit-maximizing agents and the models have strong microfoundations. We therefore would like to maintain the basic structure, while eliminating the “scale effect.”

8. Introducing a new model Simplest way that innivations evolve: We can then put restrictions on the arrival rate of new ideas: And finally that overlap of research reduce the total number of innovations so that rather than belongs in the R&D equation. Inserting this and (4) and (5) gives: (4) (5) (6)

9. The decentralized economy Three sectors: 1. A final goods sector that uses labour and producer durables 2. An intermediate-goods sector of monopolists transforming capital into producer durables using designs discovered by the third sector. 3. The R&D sector.

10. The decentralized economy Growth in the stock og knowledge: Differentiating both sides of (7) we can solve explicitly for the balanced growth path: The growth now depends on the population growth rate and not on the population stock. (7) (8)

11. The decentralized economy The share of labour in the decentralized economy:

12. The social planner

13. Setting up the usual Hamiltonian ans solving this program reveal that the growth in steady state is given once again by: And the amount of labour devoted to the R&D is:

15. Transition effects in the model Where and

16. Transition effects in the model (19) and (20) are nonlinear, but linearizing around its steady state yields:

17. Transition effects in the model The article then argues that even though the impact from changes in R&D doesn’t last forever, they can still be of great importance in the transition period. It is of importance, both in the case of over- versus underinvestment to obtain empirically plausible parameter values of λ and. Several other articles conclude that it is difficult to separately identify the effects from λ and.

18. Conclusion The paper starts with a strong prediction of R&D based models, which exhibits intertemporal scale effects. The “semi-endogenous” R&D based model proposed by the paper is more consistent with empirical findings. –It does (unlike the AK-style and the R&D based models mentioned) predict that the growth rate is determined by parameters that are typically invariant to policy manipulation. –As in the Solow model, subsidies to R&D and to capital- accumulation have no long run effects, but only affect the transition path. –But unlike the Solow-model, this model is endogenous in the sense that it derives from the pursuit of new technologies by rational, profit-maximizing agents. –The model provides a well defined answer to the question, Why do economies exhibit sustained per capita income growth?