NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Quality Ladders and Product Cycles

Gene M. Grossman, Elhanan Helpman

NBER Working Paper No. 3201*
Issued in December 1989
NBER Program(s):   EFG    ITI    IFM

We develop a two-country model of endogenous innovation and imitation in

order to study the interactions between these two processes. Firms in the

North race to bring out the next generation of a set of technology-intensive

products. Each product potentially can be improved a countably infinite

number of times, but quality improvements require the investment of resources

and entail uncertain prospects of success. In the South, entrepreneurs invest

resources in order to learn the production processes that have been developed

in the North. All R&D investment decisions are made by forward looking,

profit maximizing entrepreneurs. The steady-state equilibrium is

characterized by constant aggregate rates of innovation and imitation. Ve

study how these rates respond to changes in the sizes of the two regions and

to policies in each region to promote learning.

*Published: QJE< May 1992pp. 557-586

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