Schumpeterian Growth Model Research Articles

Status-seeking culture and development of capitalism

According to Werner Sombart’s classic text Luxury and Capitalism , the status-seeking behavior of individuals may facilitate the development of capitalism and an early industrialization. In this study, we develop a growth-theoretic framework to formalize this hypothesis by introducing a status-seeking preference into the Schumpeterian growth model of endogenous takeoff. Then, we explore how this cultural preference affects the transition of an economy from pre-industrial stagnation to modern economic growth. We find that the effects of status-seeking behaviors evolve across different stages of economic development. Specifically, a stronger preference for status seeking causes an earlier takeoff and increases economic growth in the short run but has an overall negative effect on the steady-state equilibrium growth rate. Finally, we calibrate the model to US data to perform a quantitative analysis and also use cross-country data to estimate the effects of status-seeking preference on economic growth.

Development banking under weak institutions and imperfect credit markets

Governments have created development banks in hopes of accelerating growth. Theoretical growth models that assess the pertinence of these banks are scarce and, none of them analyzes the implication of these banks under weak institutions and underdeveloped financial markets, which are two common problems in poor countries. This article studies the implications of subsidies to producers, a monopoly bank, or to a development bank, for the technology adoption and welfare in a Schumpeterian growth model in which creditors cannot completely eradicate moral hazard. I find that under these circumstances, the innovator will under-invest in research and, although subsidies contribute to a higher level of technology in the economy, they may harm the welfare of the working class. Subsidies to a development bank can be the most effective measure in terms of catching up with advanced economies, but this policy can be the most negative for the economic environment by diverting a large amount of resources from investment in research. Finally, this policy harms workers’ welfare when they finance the subsidy.

Optimal Privatization and Economic Growth in a Schumpeterian Economy

This paper analyzes the growth and welfare effects of the privatization of public firms in a Schumpeterian growth model. Two alternative definitions of privatization are proposed in our model. The first is the ratio of mixed R&D firms’ equity shares owned by the household, which is dubbed vertical privatization. The second is the number of unmixed R&D firms, which is called horizontal privatization. We find that, under both definitions, privatization is beneficial to economic growth while the effect of privatization on social welfare is ambiguous. Accordingly, our analysis reveals that a partial privatization could be an optimal policy. Moreover, we also discuss how the extent of patent protection is related to optimal privatization.

The cumulative cost of regulations

We estimate the effects of federal regulation on the value added to GDP for a panel of 22 industries in the United States over a period of 35 years (1977–2012). The structure of our linear specification is explicitly derived from the closed-form solutions of a multisector Schumpeterian model of endogenous growth. We allow regulation to enter the specification in a fairly flexible manner. Our estimates of the model's parameters are then identified from covariation in some standard sector-specific data joined with RegData 2.2, which measures the incidence of regulations on industries based on a text analysis of federal regulatory code. With the model's parameters fitted to real data, we confidently conduct counterfactual experiments on alternative regulatory environments. Our results show that regulatory restrictions have had a net effect of dampening economic growth by approximately 0.8 percent per annum since 1980. Had regulation been held constant at levels observed in 1980, our model predicts that the economy would have been nearly 25 percent larger by 2012 (i.e., regulatory growth since 1980 cost GDP $4 trillion in 2012, or about $13,000 per capita).

Money, Growth, and Welfare in a Schumpeterian Model with the Spirit of Capitalism

According to Schumpeter (1934), entrepreneurs are driven to innovate not for the fruits of success but for success itself. This description of entrepreneurship echoes Weber’s (1958 ) description of the “spirit of capitalism,” which states that people enjoy the accumulation of wealth irrespective of its effect on smoothing consumption. This paper explores the implications of the spirit of capitalism on monetary policy, growth, and welfare in a Schumpeterian growth model. Different from the existing literature, we show that money is not superneutral in the long run and it could promote economic growth when the spirit of capitalism is strong. Furthermore, we show the optimal nominal interest rate decreases with the strength of the spirit of capitalism, potentially supporting a negative interest rate. Finally, our calibrated model suggests that the spirit of capitalism explains an important share (about one-third) of long-run growth in the United States.

Modeling the Cost of Technology Transfer and Economic Growth in Nigeria

This research studies the effects of wireless mobile phone technology on technology transfer and economic growth, and its distributional consequence in Nigeria. After deregulation of telecom industry, wireless technology has become widely available in Nigeria The current study argues that the availability of wireless technology helps to reduce the cost of learning and implementing world technology frontier and thus that it promotes smoother transfer of technology from technologically-advanced countries to Nigeria and brings significant growth in the economy. Using a multi-sector Schumpeterian growth model, thus, it explains the relationship between the cost of technology transfer and economic growth. The model generates two equilibria where the low equilibrium has zero growth. This study shows that a group with low cost of technology transfer is likely to achieve the high growth equilibrium while a group with high cost of technology transfer is likely to achieve the low growth equilibrium. Using the industry-level and the state-level data, the study found that the availability of wireless technology increased transfer of technology measured by the volume of imports and spurred growth in Nigeria. Moreover, the research found that the benefit of the wireless technology is greater for lower income groups and thus the technology helped to reduce distributional inequality of economic benefit.

Effects of patents on the transition from stagnation to growth

This study provides a growth-theoretic analysis of the effects of intellectual property rights on the take-off of an economy from an era of stagnation to a state of sustained economic growth. We incorporate patent protection into a Schumpeterian growth model in which take-off occurs when the population size crosses an endogenous threshold. We find that strengthening patent protection has contrasting effects on economic growth at different stages of development. Specifically, it leads to an earlier take-off but also reduces economic growth in the long run.

An International Comparison of Skills, Traits and Job Mobility

Making use of an international survey that directly assesses the cognitive skills of the adult population, I document systematic differences in the effect of skills on job mobility across the 37 countries in the sample. While economic growth is associated with relatively higher job mobility among skilled workers, the prevalence of information and communication technology (ICT) in the workplace is associated with relatively lower job mobility. The documented patterns are in line with Schumpeterian growth models of creative destruction in which skilled workers transition to jobs with advanced technologies more easily.

Are Markups Too High? Competition, Strategic Innovation, and Industry Dynamics

Since the 1970s, there have been significant changes in firm dynamics within and across industries in the US. Industries are increasingly dominated by a small number of large firms (superstars). Markups, market concentration, profits, and R&D spending are increasing, whereas business dynamism, productivity growth, and the labor share are in decline. We develop a unified framework to explore the underlying economic mechanisms driving these changes, and the implications for economic growth and social welfare. Our theoretical framework combines a detailed oligopolistic competition structure featuring endogenous entry and exit with a new Schumpeterian growth model. Within each industry, there are an endogenously determined number of superstars that compete a la Cournot and a continuum of small firms which collectively constitute a competitive fringe. Firms dynamically choose their innovation strategies, cognizant of other firms' choices. The model is consistent with the changes in the macroeconomic aggregates, and it replicates the empirical relationship between innovation and competition within and across industries. We estimate the model to disentangle the effects of separate mechanisms on the structural transition, which yields striking results: (1) While the increase in the average markup causes a significant static welfare loss, this loss is overshadowed by the dynamic welfare gains from increased innovation in response to higher profit opportunities. (2) The decline in productivity growth is largely driven by the increasing costs of innovation, i.e., ideas are getting harder to find.

INFLATION AND GROWTH: A NON-MONOTONIC RELATIONSHIP IN AN INNOVATION-DRIVEN ECONOMY

This paper investigates the effects of monetary policy on long-run economic growth via different cash-in-advance (CIA) constraints on R&D in a Schumpeterian growth model with vertical and horizontal innovations. The relationship between inflation and growth is contingent on the relative extents of CIA constraints and diminishing returns to two types of innovation. This model can generate a mixed (monotonic or non-monotonic) relationship between inflation and growth, given that the relative strength of monetary effects on growth between different CIA constraints and that of R&D-labor-reallocation effects between different diminishing returns vary with the nominal interest rate. In the empirically relevant case where horizontal R&D is subject to larger diminishing returns than vertical R&D, inflation and growth can exhibit an inverted-U relationship when the CIA constraint on horizontal R&D is sufficiently larger than that on vertical R&D. Finally, we calibrate the model to the US economy and find that the growth-maximizing rate of inflation is around 2.4%, which is consistent with the recent empirical estimates.

Domestic demand-based economic globalization and inclusive growth

Purpose The purpose of this paper is to propose policy recommendations that resort to the domestic market to achieve inclusive growth from an open perspective. Design/methodology/approach How will economic globalization based on domestic demand affect economic growth and income distribution in an open and large country? With the aim of discussing the mechanism of the impact of expanding domestic demand on the inclusive growth from an open perspective, this paper incorporates the Global Value Chains vs National Value Chains (GVC-NVC) competition, which is triggered by foreign investments attracted by the domestic demand scale into an endogenous growth model with “Schumpeterian Innovation.” Findings Theoretical analysis indicates the following findings: although domestic demand-based economic globalization can promote transnational inclusive growth across countries, it is not conducive to national (domestic) inclusive growth; the impacting effect of domestic demand scale on inclusive growth across countries is subject to the moderating effect of the development maturity of the labor market; and the impacting effect of domestic demand scale on national inclusive growth is subject to the joint moderating effect of the development maturity of the labor market and labor skill structure. Originality/value First, this paper examines the impact of domestic demand-based economic globalization on the inclusiveness of economic growth from an open perspective, which deepens the existing theory of intra-product specialization and inclusive growth. Second, the paper puts the sequential production process into Schumpeterian growth model and reveals the mechanism that domestic demand affects inclusive growth. Third, the study finds that the enhancement of labor market efficiency, transfer payments to low-skilled labor and the creation of a fair competitive market environment will contribute to the globalization of a domestic demand-oriented economy, which provides a policy-making basis for government sectors.

Debt, Innovation, and Growth

Recent empirical studies show that innovative firms heavily rely on debt financing. Debt overhang implies that debt hampers innovation by incumbents. A second effect of debt is that it stimulates innovation by entrants. Using a Schumpeterian growth model with endogenous R&D and financing choices, we demonstrate that this second effect always dominates, so that debt fosters innovation and growth at the aggregate level. Our analysis suggests that the relation between debt and investment is more complex than previously acknowledged and highlights potential limitations of empirical work that focuses solely on incumbents when measuring the effects of debt on investment.

Inflation and income inequality in a Schumpeterian economy with menu costs

This study incorporates heterogeneous households into a monetary Schumpeterian growth model via menu costs to explore the effect of inflation on income inequality. The source of income inequality stems from the unequal distribution across households’ assets. Given that households face the same wage rate, inflation that leads to a monotonically decreasing effect on economic growth helps mitigate income inequality by weakening the contribution of asset income relative to wage income.

The factor of creative destruction in modern economic growth models and growth policy

The paper examines the place of Schumpeterian idea of creative destruction in endogenous growth models, as well as its relevance for national competitive strategies under the ‘new normal’ situation. The difference between Schumpeterian growth models and the model elaborated by P. Romer is revealed. The paper analyzes modern interpretation of creative destruction as a process displacing low-performing firms by high-performing ones, as well as old products and technologies by more innovative ones through a market competition. It is shown that this process accelerates the dynamics of firms and the turnover of resources in an economy, thus leading to reallocation of investments and knowledge to the most productive agents. The paper highlights the importance of sustaining a dynamic balance between measures stimulating a firm-level innovation activity and measures supporting a barrier-free environment for an effective resource allocation in the economy. We consider cases of several developed and developing countries, which demonstrate negative implications of underutilized advantages of creative destruction and the risks of selective supporting policies towards exclusively high-growing firms. We conclude that without restarting the process of creative destruction in the Russian economy the national efforts to enhance competitiveness and growth may turn unproductive.

Inequality, Openness, and Growth through Creative Destruction

We examine how inequality and openness interact in shaping the long-run growth prospects of developing countries. To this end, we develop a Schumpeterian growth model with heterogeneous households and non-homothetic preferences for quality. We show that inequality affects growth very differently in an open economy as opposed to a closed economy: If the economy is close to the technological frontier, the positive demand effect of inequality on growth found in closed-economy models may be amplified by international competition. In countries with a larger distance to the technology frontier, however, rich households satisfy their demand for high quality via importing, and the effect of inequality on growth is smaller than in a closed economy and may even be negative. We show that this theoretical prediction holds up in the data, both when considering growth in export quality at the industry level and when considering growth in GDP per capita.

Technology diffusion, innovation size, and patent policy

We develop a Schumpeterian growth model based on technology diffusion and innovation, whereby the distribution of the innovation size is endogenously determined. Firms improve the targeted products by randomly combining existing technologies owned by other firms. Furthermore, the firms contribute to the adoption of newly developed frontier technology. The innovators must attain the minimum innovation size required for a patent. That is, the patent office grants patents only for superior innovations. We show that an increase in the minimum innovation size may reduce the average patentable innovation size because of an endogenous response of the distribution of innovation size. This implies that even if the patent office requires superior innovations in order to assign patents, innovators tend to produce inferior patentable innovations on average.

Innovation by Heterogeneous Leaders*

AbstractWe develop a Schumpeterian growth model in which leaders and followers conduct research and development (R&D) activities and in which leaders have different‐sized quality leads over their followers, and thus have different profit flows. We show that leaders with larger quality leads make smaller R&D investments; this result is consistent with the actual behaviors of some previous leader firms, such as Sony and Eastman–Kodak. Moreover, we show that subsidizing the R&D of followers can promote the aggregate R&D of leaders, because promotion of followers' R&D decreases (increases) the number of leaders with larger (smaller) quality leads and smaller (larger) R&D investments.

Cross-country Knowledge Spillovers and Innovations in Less Developed Countries in the Context of the Schumpeterian Growth Model

We develop a theoretical model that focuses on the effects of international knowledge spillovers on the country’s horizontal (variety expansion) and vertical (quality-improving) RD however, our results emphasize the importance of developing domestic R&D projects and improving the efficiency of those projects for LDC rather than relying on foreign knowledge spillovers. In the presence of sunk costs, nonetheless, running efficient R&D projects is justified only when the country is relatively large in size.

Innovation and inequality in a monetary Schumpeterian model with heterogeneous households and firms

This study develops a monetary Schumpeterian growth model with heterogeneous households and heterogeneous firms to explore the effects of inflation on innovation and income inequality. Household heterogeneity arises from an unequal distribution of wealth. Firm heterogeneity arises from random quality improvements. Under endogenous firm entry, inflation has an inverted-U effect on economic growth and income inequality. Calibrating the model for a quantitative analysis, we find that the model can match the growth-maximizing and inequality-maximizing inflation rates that are estimated using cross-country panel data. Finally, we simulate the utility-maximizing inflation rate and explore how it is affected by relative household wealth.

Interaction matrix selection in spatial autoregressive models with an application to growth theory

The interaction matrix, or spatial weight matrix, is the fundamental tool to model cross-sectional interdependence between observations in spatial autoregressive models. However, it is most of the time not derived from theory, as it should be ideally, but chosen on an ad hoc basis. In this paper, we propose a modified version of the J test to formally select the interaction matrix. Our methodology is based on the application of the robust against unknown heteroskedasticity GMM estimation method, developed by Lin and Lee (2010). We then implement the testing procedure developed by Hagemann (2012) to overcome the decision problem inherent to non-nested models tests. An application of the testing procedure is presented for the Schumpeterian growth model with worldwide interactions developed by Ertur and Koch (2011) using three different types of interaction matrices: genealogic distance, linguistic distance and bilateral trade flows. We find that the interaction matrix based on trade flows is the most adequate.