Working Paper: CEPR ID: DP14250
Authors: Helene Latzer; Kiminori Matsuyama; Mathieu Parenti
Abstract: In the standard horizontal innovation model of endogenous growth, larger economies innovate more and grow faster. Due to the homotheticity of preferences, however, it does not matter whether the large market size comes from a large population or a high per capita expenditure. In this paper, we extend the standard model to allow for nonhomothetic preferences. Among others, we show that, holding the size fixed, economies with higher per capita expenditure and smaller populations innovate more and grow faster for the empirically relevant case of incomplete pass-through, strategic complementarity in pricing, and procompetitive entry.
Keywords: Endogenous growth; Balanced growth; Horizontal innovation; Nonhomothetic preferences; Directly explicitly additive DEA preferences; Demand composition; Incomplete pass-through; Strategic complementarity in pricing; Procompetitive entry; Competition and growth
JEL Codes: O11; O31; O33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| per capita expenditure (D12) | innovation outcomes (O36) |
| per capita expenditure (D12) | growth rates (O40) |
| markup rate (D40) | innovation rates (O39) |
| discount rate/innovation costs/population size (O39) | markup rate and innovation rates (O39) |