Abstract
When technological change affects the prices of tradeable assets, innovators can obtain speculative profits by exploiting their inside information as to the occurrence of innovations. We propose a tractable model of endogenous growth that formalizes this argument, originally due to Hirshleifer (1971). We then use the model to assess two claims advanced by Hirshleifer, namely, that speculative profits can generate excessive investment in R&D when they add to monopoly rents guaranteed by patent protection, or else even in a perfectly competitive economy. The analysis confirms the first claim, but casts doubts on the second one. (JEL O30, O40)
Highlights
In a classic paper, Hirshleifer (1971) noted that innovations may a¤ect the equilibrium prices of various assets that are traded in the economy
We have proposed a model of a perfectly competitive economy in which inventors are rewarded by speculative pro...ts only, formalizing an insight originally due to Hirshleifer (1971)
We have shown that even the steady, predictable ‡ow of innovations that is postulated in models of equilibrium growth may create, for a range of parameter values, su¢ cient speculative opportunities to sustain persistent growth
Summary
Hirshleifer (1971) noted that innovations may a¤ect the equilibrium prices of various assets that are traded in the economy. The ...rst question is whether speculative pro...ts alone may sustain persistent innovation and growth; whether they o¤er, to use Hirshleifer’s words, “an appropriate inducement to invention.”Our analysis shows that they may, provided that the fraction of the pecuniary e¤ects of innovations that inventors obtain exceeds a minimum threshold. This threshold can be computed analytically and depends on parameters that can be assessed empirically. We modify the perfectly competitive growth model to provide an assessment of the second version of the claim, i.e. that speculative pro...ts may create overinvestment in R&D in the presence of patent protection and monopoly rents.
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