80
Chapter 3
not consistent with the horizontal innovation model, in which there should be
nothing special about the entry of foreign rms, and according to which the exit
of upstream rms should if anything reduce growth by reducing the variety of
inputs b

350
Chapter 14
1
, where k* (at) is the investment in capital under perfect markets. Use
k* ( at )
k
the entrepreneurs expected wealth maximization problem to solve for the ratio t . What is its
zt
cyclical behavior? Interpret.
c. Suppose that at <
3. *I

340
Chapter 14
14.3.5 An Alternative Explanation for the Procyclicality of R&D
To account for why even rms with deep pockets tend to have procyclical R&D,
Barlevy (2007)9 proposes the following explanation, also developed using the
Schumpeterian paradigm:

360
Chapter 15
xit = Ait L 2 (1 )
and
*
xit = Ait L* 2 (1 )
and substituting these into the production functions (15.8) and (15.9), we see that
nal-good production in the two countries will be proportional to their
populations:
Yt = At L and Yt* = A t L*

330
Chapter 14
where at, represents an exogenous aggregate productivity (or demand) shock in
period t.7
As in real business cycle (RBC) models, the shock is assumed to follow a
random process of the form
ln at = ln at 1 + t
(14.5)
where et is normally dis

320
Chapter 14
Another wave of volatility and growth models uses the Schumpeterian paradigm. In this approach, the relationship between volatility and growth is governed
by research-arbitrage equations. A rst attempt at explaining the cyclicality of
R&D i

310
Chapter 13
(2000). Here, as in the preceding cross-country panel regressions, the endogeneity
problem can be stated as follows: If states or countries choose their composition
of education spending according to the model, then we should see the compos

290
Chapter 13
physical and to human capital accumulation. However, the MRW model also
implies that a government policy that would maintain a positive rate of human
capital accumulation would also guarantee a positive long-run rate of growth. For
example,

300
Chapter 13
13.3.2 Low-Development Traps Caused by the Complementarity between R&D
and Education Investments
The following model, inspired by Acemoglu (1997) and Redding (1996), delivers
multiple development paths as in the Azariadis-Drazen model, alth

Chapter 12
Total factor productivity growth
280
0.08
0.06
0.04
0.02
0
0.02
0
0.02
0.04
0.06
Entry rate of foreign firms in the market
Figure 12.2
Entry, TFP growth, and distance to frontier
Figure 12.2 summarizes the ndings. The upper line depicts how pro

270
Chapter 12
the leaders unit cost is c. She is constrained to setting a price p1 gc because gc
is the rivals unit cost, so at any higher price the rival could protably undercut
her price and steal all her business. Thus the leaders prot will be
1 = p1

370
Chapter 15
the home country does not innovate when behind (mC = 0). Then, as we have
seen, all monopolies will remain forever in the foreign country.
This is the case in which, as we saw previously, the home countrys level of
national income might act

380
Chapter 16
= max cfw_ p( x ) x x
x
which yields
2
x = 1 ALR 1
which, in turn yields (after substituting the xs in the expression for Y)
2
Y = 1 LAR 1
(16.5)
Now suppose that the government can impose that R decreases over time at an
exponential rate

The Economics of Growth
Philippe Aghion and Peter Howitt
Complete Contents
Sample Chapter - Download PDF (582 KB) vii
Preface
Sample Chapter - Download PDF (591 KB) xvii
Acknowledgments
Sample Chapter - Download PDF (570 KB) xxi
Introducti

470
References
Kremer, M. (1998). Patent Buyouts: A Mechanism for Encouraging Innovation. Quarterly Journal
of Economics, 113, 11371167.
Krueger, A., and M. Lindahl. (2001). Education for Growth: Why and for Whom? Journal of Economic Literature, 39, 11011

450
Appendix
correlated. In particular, if education is increased, so is abilityfor example, as
a result of selection by schools. Then, by not considering the effect of ability on
growth, we assign an additional effect of education on growth that should h

440
Chapter 18
example, (1) the impact of nancial bubbles and regulations on innovation and
growth; (2) the interplay between growth, the design of the tax system, and the
composition of government spending; (3) the contribution of basic science and
open

430
Chapter 18
marginal rates of return in certain investment opportunities in both physical and
human capital coexisting with much lower returns, whereas in the world of the
aggregate production function all these marginal returns would have to be more
o

420
Chapter 18
In part III we looked at growth-enhancing policies in more detail. First, we saw
that competition and entry can be growth enhancing in spite of reducing post innovation rents. We showed that competition and entry enhance growth mostly in
se

400
Chapter 17
Two recent studies have contributed to lowering our hopes of uncovering any
interesting effect of democracy on growth. The rst study, by Acemoglu, Johnson,
Robinson, and Yared (2005), henceforth AJRY, shows that the positive correlation
bet

410
Chapter 17
of entry barriers in AAT, borrowed from Djankov and colleagues, is the number
of bureaucratic procedures needed for a rm to enter the market. This is important
for our story because we argue that democracy matters for more advanced sectors

250
Chapter 11
we immediately obtain the following linear relationship between the countrys
distance to frontier at at date t and the distance to frontier at1 at date t 1:6
at =
1
( + at 1 )
1+ g
(11.3)
This equation clearly shows that the relative import

240
Chapter 11
the number of procedures entrepreneurs have to go through when creating a new
rm.
A main limitation of this approach is that it remains cross-sectional, and in
particular does not control for country or region xed effects. Another problem
w

100
Chapter 4
introduce capital into the analysis in such a way as to make it consistent with
these exercises. Another problem with the theory is the assumption of perfect
nancial markets; in reality, R&D rms rely very much on capital markets, which
seem

110
Chapter 5
but because we are able to produce a higher quality of capital goods than before,
so that the price of a quality-adjusted unit of capital has fallen. For example,
it costs about the same as 10 years ago to produce one laptop computer, but yo

90
Chapter 4
It follows that growth will be random. In each period, with probability m the
A At 1
entrepreneur will innovate, resulting in gt = t 1
= 1; and with
At 1
A At 1
probability 1 m she will fail, resulting in gt = t 1
= 0. The growth
At 1
rate w