Investment, R&D, and Long-Run Growth PDF

In the 1990s, growth theory has incorporated imperfect competition in its investigations.

This innovation has proven to be seminal: Cleviating from growth models with perfect competition, the new framework featured forward- looking entrepreneurs.

Firms maximize profits intertemporarily, i. e. their in- vestment leads to instantaneous sunk costs and offers flows of future profits.

Firms finance this investment by launching shares. The capital market is per- fectly competitive, implying that the return on a share is equal to the return on a bond.

As opposed to the capital market, the goods market is imperfectly competitive.

As a result of investment, firms enjoy market power.

That is, firms may acquire the capability to provide a product that is differentiated in, e. g. , styling, technology, accessibility, or reputation.

The launch of a dif- ferentiated product allows to capture a market niche, and successful firms may price above marginal cost.

The resulting profit flows are channelled to the firms' shareholders.

The introduction of monopolistic competition into growth theory is valuable: real world economies may be portrayed rather by such an imperfect competition framework than by a perfect competition approach.

Starting with Romer (1990), in growth theory, modeling of imperfect competition has been notoriously bound to a focus on the impact of research and development (R&D) on economic growth.

In the existing literature, growth-affecting investment is restricted to R&D investment.