What Causes Over‐investment in R&D in Endogenous Growth Models? | Zendy

Denicolò Vincenzo | Zendy; Zanchettin Piercarlo | Zendy

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What Causes Over‐investment in R&D in Endogenous Growth Models?

Author(s) -

Denicolò Vincenzo,

Zanchettin Piercarlo

Publication year - 2014

Publication title -

the economic journal

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 4.683

H-Index - 160

eISSN - 1468-0297

pISSN - 0013-0133

DOI - 10.1111/ecoj.12132

Subject(s) - innovator , investment (military) , economics , economic rent , endogenous growth theory , microeconomics , work (physics) , neoclassical economics , monetary economics , market economy , entrepreneurship , finance , human capital , law , politics , political science , mechanical engineering , engineering

Endogenous growth models may exhibit either under or over‐investment in R&D. The possibility of over‐investment is generally attributed to a business stealing effect that arises as the latest innovator destroys and/or appropriates previous incumbent's rents. We argue that this conventional wisdom is misleading. In standard models, business stealing by itself cannot result in excessive R&D. We explain the other effects that must be at work here, thus contributing towards a better understanding of when and why the market may be biased towards excessive R&D.

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