Abstract/Index

This paper presents a model of innovations and economic growth, which departs from standard endogenous growth models by assuming that the set of potential projects for innovation in each period is limited. The model differs in a number of results from former endogenous growth models. First, it explains patent races, where many research teams search for the same potential innovation. Second, the rate of growth of the economy is bounded and does not rise too much with the scale of the economy. Namely, the model gives rise to a non-linear relationship between the size of the R&D sector and the rate of growth. Third, R&D is Pareto-inefficient, as there are too many research teams searching for the same breakthrough. This problem increases with scale. Fourth, concentration of R&D by monopolistic firms is explained in this model by risk aversion.