NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Quality Improvements in Models of Growth

Robert J. Barro, Xavier Sala-i-Martin

NBER Working Paper No. 4610
Issued in January 1994
NBER Program(s):   EFG   PR

Technological progress takes the form of improvements in quality of an array of intermediate inputs to production. In an equilibrium that is standard in the literature, all research is carried out by outsiders, and success means that the outsider replaces the incumbent as the industry leader. The equilibrium research intensity involves three considerations: leading-edge goods are priced above the competitive level, innovators value the extraction of monopoly rents from predecessors, and innovators regard their successes as temporary. We show that, if industry leaders have lower costs of research, then the leaders will do all the research in equilibrium. However, if the cost advantage is not too large, then the equilibrium research intensity and growth rate depend on the existence of the competitive fringe and take on the same values as in the standard solution. We discuss the departures from Pareto optimality and analyze the determination of the economy's rate of return and growth rate.

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Document Object Identifier (DOI): 10.3386/w4610

Published: With N. Gregory Mankiw, published as "Capital Mobility in Neoclassical Models of Growth", American Economic Review, Vol. 85, no. 1 (1995): 103- 115.

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