Heterogeneous firms invest in R&D and expansion investment.Venture capital specializes in R&D financing where problems are largest. Marginal firms get funded by venture capital, while firms with larger debt capacity obtain cheaper bank financing. In the latestage, cash-rich firms invest at an optimal scale, while cash-poor
firms are restricted. A country's financial and institutional development determines entry and expansion of firms and their comparative advantage in producing innovative goods. We illustrate how tariffs, R&D subsidies, institutional reform and venture capital improve access to capital, expand innovative industries, boost national welfare and may result in ambiguous international welfare spillovers.
Access to external funds is crucial for the entry and expansion of entrepreneurial firms and the sectors they predominantly arise in. This paper reports three important results. First, comparative advantage is shaped by factor endowments as well as fundamental determinants of corporate finance. In particular, a larger equity ratio of firms and tough governance standards relax financing
constraints, lead to entry of firms at the lower bound of the productivity distribution, and create an endogenous comparative advantage in sectors where entrepreneurial firms are clustered. Second, a small degree of protection in the constrained sector can raise a country’s welfare by relaxing financing constraints if terms-of-trade effects are small. Third, a small degree of protection of the financially dependent industry in a financially underdeveloped country might even raise world welfare.
In this paper we investigate wealth inequality/polarization properties related to the support of the limit distribution of wealth in innovative economies characterized by uninsurable individual risk. We work out two simple successive generation examples, one with stochastic human capital accumulation and one with R&D, and prove that intense technological progress makes the support of the wealth distribution converge to a fractal Cantor-like set. Such limit distribution implies the disappearance of the middle class, with a "gap" between two wealth clusters that widens as the growth rate becomes higher. Hence, we claim that in a highly meritocratic world in which the
payoff of the successful individuals is high enough, and in which social mobility is strong, societies tend to become unequal and polarized. We also show that a redistribution scheme financed by proportional taxation does not help cure society's inequality/polarization - on the contrary, it might increase it - whereas random taxation may well succeed in filling the gap by giving rise to an artificial middle class, but it hardly makes such class sizeable enough. Finally, we investigate how disconnection, a typical feature of Cantor-like sets, is related to inequality in the long run.
The current British Government's "Big Society" plan is based on the idea that granting more freedom to local communities and volunteers will compensate for a withdrawal of public agencies and spending. This idea is grounded on a widely held belief about the relationship between government and volunteering: a high degree of government intervention will cause a crowding out of voluntary activity. Up to now, however, the crowding out hypothesis has hardly been supported by any empirical evidence or solid theoretical foundations. We develop a simple theoretical model to predict how fiscal policy affects the individual decision to volunteer or not. The predictions of the model are tested through the econometric analysis of two survey data sets, and interpretative analysis of narratives of local volunteers and public officials. Contrary to conventional wisdom, our results suggest that volunteering, by the individuals in the actively working population, declines when government intervention is decreased.
The incentives to conduct basic or applied research play a central role for economic growth. How does increasing early innovation appropriability affect basic research, applied research, innovation and growth? In a common law system an explicitly dynamic macroeconomic analysis is appropriate. This paper analyzes the macroeconomic effects of patent protection by incorporating a two-stage cumulative innovation structure into a quality-ladder growth model with endogenous skill acquisition. We focus on two issues: (a) the over-protection versus the under-protection of intellectual property rights in basic research; (b) the evolution of jurisprudence shaping the bargaining power of the upstream innovators. We show that the dynamic general equilibrium interactions may seriously mislead the empirical assessment of the growth effects of IPR policy: stronger protection of upstream innovation always looks bad in the short- and possibly medium-run. We also provide a simple "rule of thumb" indicator of the basic researcher bargaining power.
To foster innovation and growth should basic research be publicly or privately funded? This paper studies the impact of the gradual shift in the U.S. patent system towards the patentability and commercialization of the basic R&D undertaken by universities. We see this movement as making universities becoming responsive to "market" forces. Prior to 1980, universities undertook research using an exogenous stock of researchers motivated by "curiosity." After 1980, universities patent their research and behave as private firms. This move, in a context of two-stage inventions (basic and applied research) has an a priori ambiguous effect on innovation and welfare. We build a Schumpeterian model and match it to the data to assess this important turning point.
R&D investment has well-known liquidity problems, with potentially important consequences. In this paper, we analyze the effects of monetary policy on economic growth and social welfare in a Schumpeterian model with cash-in-advance (CIA) constraints on consumption, R&D investment, and manufacturing. Our results are as follows. Under the CIA constraints on consumption and R&D (manufacturing), an increase in the nominal interest rate would decrease (increase) R&D and economic growth. So long as the effect of cash requirements in R&D is relatively more important than in manufacturing, the nominal interest rate would have an overall negative effect on R&D and economic growth as documented in recent empirical studies. We also analyze the optimality of Friedman rule and find that Friedman rule can be suboptimal due to a unique feature of the Schumpeterian model. Specifically, we find that the suboptimality or optimality of Friedman rule is closely related to a seemingly unrelated issue that is the overinvestment versus underinvestment of R&D in the market economy, and this result is robust to alternative versions of the Schumpeterian model.
It is well known that agents may smooth out non-convexities using lotteries. Can agents use time and money instead? We show that in a labor model with a fixed cost of working, workers perfectly smooth their consumption if they have access to money governed by the Friedman rule. Away from the Friedman rule, workers repeat their choices over money cycles of finite length. They begin cycles with no money and end cycles by spending all of their money on vacations. A hot-potato effect causes workers to front-load consumption to the start of each money cycle, which is an inefficient distortion away from perfect consumption smoothing.
In an aging world, how does a country's demographic structure impact global trades in safe and risky assets and their respective prices? We answer these questions combining portfolio choice over the life-cycle with a two-region, general equilibrium model. We show that when one region is aging faster than the other, its demand for both safe and risky assets increases, whereas a greater portfolio share is allocated into safe assets. Absent perfectly elastic supply, this results in a change in autarky rates and, in an open economy, in international asset trades. Calibrating the model to the U.S. and Europe, we predict a positive net external equity position and a negative net external debt position for the U.S. The model allows us to quantitatively assess the impact of demographic change on trade in various types of assets, whereas previously, the focus has been on aggregate capital flows. In addition, general equilibrium price effects can explain a significant portion of the valuation effects present in international foreign asset positions.
