Quality Improvements in Models of Growth

Robert J. Barro and Xavier X. Sala-i-Martin

National Bureau of Economic Research Working Paper: 4610 January 1994, pp. 39.


Technological progress takes the form of improvements in quality of an array of intermediate inputs to production. In an equilibrium that is standard in the literature, all research is carried by outsiders, and success means that the outsider replaces the incumbent as the industry leader. The equilibrium research intensity involves three considerations: leading-edge goods are priced above the competitive level, innovators value the extraction of monopoly rents from predecessors, and innovators regard their successes as temporary. We show that if industry leaders have lower costs of research, then the leaders will do all the research in equilibrium. However, if the cost advantage is not too large, then the equilibrium research intensity and growth rate depend on the existence of the competitive fringe and take on the same values as in the standard solution. We discuss the departures from Pareto optimality and analyze the determination of the economy's rate of return and growth rate.


Innovation and Invention: Processes and Incentives, O310. Management of Technological Innovation and R&D, O320. Technological Change and Innovation, 6211. Research and Development, 6212.