Economic growth and economic development 600

Introduction to Modern Economic Growth
can imagine that once the patent runs out, the firm will cease making profits on its
innovation. In this case, it can easily be shown that growth is maximized by having
as long patents as possible. Again there is a tradeoff here between the equilibrium
growth rate of the economy and the static level of welfare.
Perhaps, more important than these trade-offs between growth and level is the
fact that the models discussed in this chapter do not feature an interesting type of
competition among firms. The quality competition (Schumpeterian) models introduced in the next chapter will allow a richer analysis of the effect of competition on
innovation and economic growth.

13.2. Growth with Knowledge Spillovers
In the model of the previous section, growth resulted from the use of final output
for R&D. This is similar, in some way, to the endogenous growth model of Rebelo
(1991) we studied in Chapter 11, since the accumulation equation is linear in accumulable factors. As a result, we saw that, in equilibrium, output took a linear form
in the stock of knowledge (new machines), thus a AN form instead of the Rebelo’s
AK form.
An alternative is to have “scarce factors” used in R&D. In other words, instead
of the lab equipment specification, we now have scientists as the key creators of
R&D. The lab equipment model generated sustained economic growth by investing
more and more resources in the R&D sector. This is impossible with scarce factors,
since, by definition, a sustained increase in the use of these factors in the R&D sector
is not possible. Consequently, with this alternative specification, there cannot be
endogenous growth unless there are knowledge spillovers from past R&D, making
the scarce factors used in R&D more and more productive over time. In other words,
we now need current researchers to “stand on the shoulder of past giants”. In fact,
the original formulation of the endogenous technological change model by Romer
(1990) relied on this type of knowledge-spillovers, assuming that researchers do
indeed stand on the shoulders of past giants as part. While these types of knowledge
spillovers might be important in practice, the lab equipment model studied in the
previous section was a better starting point for us, since it clearly delineated the
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