Working Paper: NBER ID: w3099
Authors: Gene M. Grossman; Elhanan Helpman
Abstract: We develop a model of repeated product improvements in a continuum of sectors. Each product follows a stochastic progression up a quality ladder. Progress is not uniform across sectors, so an equilibrium distribution of qualities evolves over time. But the rate of aggregate growth is constant. The growth rate responds to profit incentives in the R&D sector. We explore the welfare properties of our model. Then we relate our approach to an alternative one that views product innovation as a process of generating an ever expanding range of horizontally differentiated products. Finally, we apply the model to issues of resource accumulation and international trade.
Keywords: quality improvement; economic growth; R&D; innovation
JEL Codes: O31; O32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| profit incentives in the R&D sector (O31) | aggregate growth rate (E10) |
| quality upgrading (L15) | total factor productivity (D24) |
| product improvements (L15) | productivity in manufacturing consumer goods and capital equipment (L60) |