What Causes Over-investment in R&D in Endogenous Growth Models?


  • We are grateful to the Editor, Martin Cripps, three anonymous referees, Gene Grossman, Antonio Minniti, and Ludovic Renou for useful comments and discussions. The usual disclaimer applies.


Endogenous growth models may exhibit either under or over-investment in R&D. The possibility of over-investment is generally attributed to a business stealing effect that arises as the latest innovator destroys and/or appropriates previous incumbent's rents. We argue that this conventional wisdom is misleading. In standard models, business stealing by itself cannot result in excessive R&D. We explain the other effects that must be at work here, thus contributing towards a better understanding of when and why the market may be biased towards excessive R&D.