TY  - JOUR
AU  - Barro,Robert J.
AU  - Sala-i-Martin,Xavier
TI  - Quality Improvements in Models of Growth
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4610
PY  - 1994
Y2  - January 1994
UR  - http://www.nber.org/papers/w4610
L1  - http://www.nber.org/papers/w4610.pdf
N1  - Author contact info:
Robert J. Barro
Department of Economics
Littauer Center 218
Harvard University
Cambridge, MA 02138
Tel: 617/495-3203
Fax: 617/496-8629
E-Mail: rbarro@harvard.edu

Xavier Sala-i-Martin
Department of Economics
Columbia University
420 West 118th Street, 1005
New York, NY 10027
Tel: 212/854-7055
Fax: 212/854-8059
E-Mail: xs23@columbia.edu
AB  - 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.
ER  -