rent protection, innovation and growth slide 1 innovation and rent protection in the theory of...

Rent Protection, Rent Protection,

Innovation and GrowthInnovation and Growth Slide Slide 11

Innovation and Rent Protection in the Innovation and Rent Protection in the Theory of Schumpeterian GrowthTheory of Schumpeterian Growth

ByByElias DinopoulosElias Dinopoulos

Schumpeterian Growth TheorySchumpeterian Growth Theory



OrganizationOrganization

This topic presents a state-of-the art growth model based on quality improvements.

The model generates endogenous long-run Schumpeterian growth without scale effects.

Readings Dinopoulos and Syropoulos (2007) Jones, Chapters 4 and 5. Dinopoulos and Thompson (1999)



MotivationMotivation R&D investment occurs in an uncertain and

insecure environment. The rents from past innovations might be

captured through imitation or further innovation.

Incumbents may engage in activities that retard the pace of innovation by potential competitors.

These activities include: Trade secrecy distribution systems that exploit lead time increased product complexity various litigation mechanisms.



Rent-protection mechanismsRent-protection mechanisms

The technological mechanismThe technological mechanism: Higher product complexity; trade secrecy

The legal mechanism:The legal mechanism: Effective monitoring and litigation

concerning possible patent infringement by challengers.

The political mechanism:The political mechanism: Lobbying politicians Bribing government officials in order to

restrict access to government services to potential competitors.



DefinitionsDefinitions This paper introduces formally the concept of Rent

Protection Activities (RPAs) in the theory of Schumpeterian Growth.

Rent-protection activitiesRent-protection activities are costly (resource using) attempts by incumbents to delay the innovation success of challengers.

Schumpeterian GrowthSchumpeterian Growth is based on the introduction of new goods or processes (as opposed to physical or human capital accumulation).



RPAs and removal of scale effectsRPAs and removal of scale effects

This paper proposes a new mechanism that removes the scale-effects property.

The mechanism is based on the notion of RPAs. We model the R&D difficulty, D(t), as an increasing

function of RPAs. R&D may may become more difficult over time because

incumbent firms may may allocate more resources to RPAs.



RPAs and removal of scale effectsRPAs and removal of scale effects

The discovery process is modeled as an R&D R&D contestcontest (instead of an R&D race): Challengers spend resources on R&D

investments

Incumbents allocate resources to RPAs.

Both the levels of R&D and RPAs are chosen endogenously, and increase exponentially in the steady-state equilibrium.



Preview of resultsPreview of results The model generates endogenous long-run

Schumpeterian growth without scale effects. Scale effects are removed from real income per

capita as well. Long-run growth is positively related to proportional

R&D subsidies and the rate of growth of population. Long run growth is closely related to income

distribution. Several steady-state properties and comparative

statics results are consistent with time series and international cross-sectional evidence.



The model: An overviewThe model: An overview

A continuum of identical households with infinitely lived members. Each household is a dynastic family whose size

grows at the rate of population growth.

Population is partitioned into specialized and non specialized labor.

There is a continuum of structurally identical industries producing final consumption goods.

Innovation takes the form of higher quality products discovered through stochastic sequential R&D contests.



The model: An overviewThe model: An overview

Each industry has three activities that exhibit constant returns to scale.

Manufacturing of final goodsManufacturing of final goods This activity uses non-specialized labor.

Innovative R&D servicesInnovative R&D services This activity uses non-specialized labor.

Rent-protection activitiesRent-protection activities This activity uses only specialized labor.



The knowledge-creation processThe knowledge-creation process

There is a continuum of industries indexed by [0.1]

A challenger j that engages in innovative R&D discovers the next higher quality product with instantaneous probability:

),(

),(),(

tD

tRtI

j

j




),(

),(),(

tD

tRtI

We will refer to I(,t) as the effective R&D. Variable I(,t) is the intensity of the Poisson process that governs the arrival of innovations in industry .

The industry-wide probability of innovating is




The present paper assumes that the level of R&D difficulty is given by

),(),( tXtD

We also assume that population N(t) grows at a constant and exogenous rate gN > 0.



ProductionProduction

A firm that produces Z(,t) units of manufacturing output incurs the cost

),( tZwL RPA services are produced with specialized labor according to the following cost function

),( tXwH



Production and household behaviorProduction and household behavior

Firm j produces innovative R&D services using only non-specialized labor according to the cost function

),( tRw jL Each household maximizes its discounted utility

dttueeU ttg N )(log0



Household behaviorHousehold behavior

Per capita utility u(t) is defined by the following equation:

dtiZtui

i

)],,(log[)(log1

0

This a standard sub utility function used in quality-ladders growth models.



Household behaviorHousehold behavior

The solution to the consumer’s maximization problem yields:

)(

)()(),(

tp

tNtctZ

)()(

)(tr

tc

tcand



R&D contestsR&D contests The flow of profits for the incumbent

monopolist in a typical industry is given by

)()(

])([),,( tXwp

tcNwtptXp HL

Each challenger engages in R&D investment, R, and each incumbent engages only in RPAs, X(t).

The strategic interactions between incumbents and challengers are modeled as a stochastic stochastic differential gamedifferential game for Poisson jump processes.



Factor marketsFactor markets The full-employment condition for non-

specialized labor is

)()(

)()1( tRw

tcNtNs

L

)()( tXtsN

The full-employment condition for specialized labor is



Steady-state (balanced-growth) Steady-state (balanced-growth) equilibriumequilibrium

The following variables are constant over time Effective R&D, I; per capita consumption expenditure, c; wages of specialized and non-specialized labor, wH and

wL; long-run growth, gU.

Long-run real per capita income, u(t), and its growth rate, gU, are given by

,loglog]log[)(log tIw

ctu

L

log)(

)(I

tu

tug

U



Innovation and resource allocation.Innovation and resource allocation. The solution to the stochastic differential game yields the

following expression for the long-run rate of innovation rate of innovation ::

L

H

w

wI

)1(

Combining several equations yields the resource conditionresource condition

Isc

s

1



R&D ConditionR&D Condition

Solving for the interest rate from the zero-profit condition and using equation (10) yields the R&D condition (26)

Igs

c N 2)1(

)1(

The resource condition defines a negatively sloped line and the R&D condition defines a positively sloped line in the c, I space.



Figure 1: Steady-state equilibriumFigure 1: Steady-state equilibrium

c

0 I

E

I*

c*

R&D Condition

Resource Condition



Basic results of the analysisBasic results of the analysis

Proposition 1: There exists a unique steady-Proposition 1: There exists a unique steady-state equilibrium such that:state equilibrium such that:

Effective R&D, the relative wage of specialized Effective R&D, the relative wage of specialized labor, per capita IBA output, and per capita labor, per capita IBA output, and per capita consumption expenditure are all bounded and consumption expenditure are all bounded and constant over time.constant over time.

Long-run Schumpeterian growth is bounded and Long-run Schumpeterian growth is bounded and does not exhibit scale effects.does not exhibit scale effects.

The removal of scale effects is consistent with time-series evidence.



Comparative steady-state resultsComparative steady-state results

Proposition 2: Proposition 2: The long-run Schumpeterian growth The long-run Schumpeterian growth rate dependsrate depends

Positively on the proportional R&D subsidy rate, Positively on the proportional R&D subsidy rate, the population growth rate, and the size of the population growth rate, and the size of innovations;innovations;

Negatively on the fraction of specialized labor, Negatively on the fraction of specialized labor, the market interest rate, the unit labor the market interest rate, the unit labor requirement in the production of R&D services, requirement in the production of R&D services, and the productivity of RPAs.and the productivity of RPAs.

Proposition 3Proposition 3 compares the social and market rates of innovation.



Commercial versus University PatentingCommercial versus University Patenting



Concluding remarksConcluding remarks The removal of scale effects from

Schumpeterian growth models is an important step in growth theory: It improves the empirical relevance of the new

growth theory. It increases the likelihood of integrating the

neoclassical and the new growth approach. It will increase our understanding of the

interactions between growth, income distribution and international market linkages.

The present paper contributes to these developments by highlighting the implications of RPAs.



Avenues for further researchAvenues for further research

The analysis suggests several avenues for further research: The transitional dynamics and welfare

properties of the model can be analyzed. A multi-country model might shed light on

the connection between comparative advantage, international technology transfer, growth and income differences across countries.

Introduction of endogenous patents and imitation-blocking activities is feasible and interesting.

rent protection, innovation and growth slide 1 innovation and rent protection in the theory of...

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