Quality Improvements in Models of Growth

45 Pages Posted: 21 Dec 2000 Last revised: 6 Feb 2021

See all articles by Robert J. Barro

Robert J. Barro

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Xavier Sala-i-Martin

Columbia University, Graduate School of Arts and Sciences, Department of Economics

Date Written: January 1994

Abstract

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 out 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.

Suggested Citation

Barro, Robert J. and Sala-i-Martin, Francesc Xavier, Quality Improvements in Models of Growth (January 1994). NBER Working Paper No. w4610, Available at SSRN: https://ssrn.com/abstract=253997

Robert J. Barro (Contact Author)

Harvard University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Francesc Xavier Sala-i-Martin

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

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