Innovate to Lead or Innovate to Prevail: When Do Monopolistic Rents Induce Growth?

56 Pages Posted: 8 May 2020

See all articles by Roberto Piazza

Roberto Piazza

Bank of Italy

Yu Zheng

Queen Mary University of London

Date Written: April 2020

Abstract

This paper extends the standard Schumpeterian model of creative destruction by allowing the cost of innovation for followers to increase in their technological distance from the leader. This assumption is motivated by the observation that the more technologically advanced the leader is, the harder it is for a follower to leapfrog without incurring extra cost for using leader's patented knowledge. Under this R&D cost structure, leaders have an incentive to play an "endpoint strategy": they increase their technological advantage, counting on the fact that followers will eventually stop innovating รข?? allowing leadership to prevail. We find that several results in the standard model now fail to hold. In addition to the High Growth steady state in which only followers innovate, there now exist two other steady states: a Medium Growth (a source) and a Low Growth (a saddle) steady state, that feature both leaders and followers innovating. An increase in monopolistic rents or an extension of patent duration increases the likelihood that over time the economy converges to a low growth steady state.

Keywords: Endogenous growth theory, Innovation, Persistent monopoly

JEL Classification: L16, O31, O34, O41

Suggested Citation

Piazza, Roberto and Zheng, Yu, Innovate to Lead or Innovate to Prevail: When Do Monopolistic Rents Induce Growth? (April 2020). CEPR Discussion Paper No. DP14558, Available at SSRN: https://ssrn.com/abstract=3594179

Roberto Piazza (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Yu Zheng

Queen Mary University of London ( email )

Mile End Road
London, London E1 4NS
United Kingdom

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