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Horizontal Innovations with Endogenous Quality Choice



We consider a growth model with horizontal innovations but assume that researchers can determine the quality of their product designs. The effort necessary to create a new product design increases with its quality so that there is a trade-off between the quantity and quality of innovations. We study the implications of this trade-off for the relative contributions of quality improvement and variety expansion to productivity growth. Due to the quality/quantity trade-off of R&D, the resolution of the scale effects problem does not result in the policy invariance of the growth rate.