Growth and trustified capitalism

Abstract

Previous models of quality improvements focus on what Schumpeter called ‘competitive capitalism’. Innovating firms drive their rivals out of business. In this paper, a model which captures important aspects of Schumpeter's notion of ‘trustified capitalism’ is developed. Innovating firms capture market share from their rivals but do not drive them out of business. Most of the results of earlier models carry over. For example, the determinants of the growth rate of quality are exactly the same as in previous models. However, two differences do arise. In contrast to previous models, quality growth is guaranteed by diminishing returns to scale in R&D. Also in contrast to previous models, the laissez faire growth rate is unambiguously below the socially optimal growth rate. The lack of ambiguity occurs because the negative profit destruction externality is weakened when innovating firms capture only part of their rivals's market share.