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.
What Causes Over-investment in R&D in Endogenous Growth Models?
Article first published online: 11 JUL 2014
© 2014 Royal Economic Society
The Economic Journal
Volume 124, Issue 581, pages 1192–1212, December 2014
How to Cite
Denicolò, V. and Zanchettin, P. (2014), What Causes Over-investment in R&D in Endogenous Growth Models?. The Economic Journal, 124: 1192–1212. doi: 10.1111/ecoj.12132
- Issue published online: 9 DEC 2014
- Article first published online: 11 JUL 2014
- Accepted manuscript online: 25 FEB 2014 07:38AM EST
- Manuscript Accepted: 5 AUG 2013
- Manuscript Received: 28 SEP 2012
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.