R&D Policy in Economies with Endogenous Growth and Non-Renewable Resources∗ (original) (raw)
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We analyze a general R&D-based endogenous growth model with a growth-essential natural resource. The economy comprises two separate sectors: final output and R&D, both directly or indirectly dependent on the natural resource. Because the resource is exhaustible and it is an essential productive input, increasing returns to scale to man-made inputs are compatible with non-explosive sustained growth. The instability problem usually associated with increasing returns is overcome thanks to the existence of imperfect markets in a decentralized economy. We find an admisible range of values for the elasticity of capital in the R&D sector under which growth is fully endogenous and saddle-path stable with no need of exogenous population growth. * We thank an anonymous reviewer for his/her helpful comments. The authors have been partially supported by MEC under projects ECO2008-01551, ECO2011-24352 (co-financed by FEDER funds) and the COST Action IS1104 "The EU in the new economic complex geography: models, tools and policy evaluation".
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R&D-based endogenous growth theory predicts long-run growth dependent on the size of the economy. Some empirical studies criticize this scale effect. Moreover, these models are theoretically criticized because of the lack of robustness linked to the knife-edge assumption of constant returns to scale to producible inputs. Semi-endogenous growth literature shows that permanent growth is still feasible with diminishing returns if based upon an exogenous growing factor, usually population growth. We prove that sustained growth under increasing returns is feasible when final output depends on non-renewable resources, which use neces-sarily shrinks in the long run. The instability problem associated with increasing returns is overcome when the final output and the R&D sectors are separately considered, and the latter depends even indirectly on the natural resource. Economic growth is fully endoge-nous because no exogenous source of growth is needed. Further no knife-edge assumption is req...
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Several R&D-based models of endogenous economic growth are investigated under the Solow-like assumption of fixed allocation of resources across activities. We identify model parameters that lead to explosive dynamics and analyze various economic techniques to avoid it. The techniques include adding stricter constraints on model trajectories and limiting factors in technology equation. In particular, we demonstrate that our vintage version of the well-known R&D-based model of economic growth [C.I. Jones, R & D-based models of economic growth, J. Polit. Econom. 103 (1995) 759-784] exhibits the same balanced dynamics as the original model.