Abstract
Endogenous growth models exhibit long-run risks, which are considered a potential explanation of the equity premium puzzle. Unlike previous literature, we use a closed-form solution of a simplified model to make the following contributions. First, we derive a set of conditions for a positive and large equity premium. Second, we match a key driver of endogenous growth, the R&D spending-to-GDP ratio. Third, we include a novel discussion on the role of patent obsolescence. Given that the literature concerns the accuracy of loglinear-lognormal solutions, we solve our model numerically with third-order perturbation. We find additional risk correction due to higher-order terms.
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