Comparative Advantage in Innovation and Production

This paper develops a dynamic model of innovation and international trade in which agents can direct their research efforts to specific goods the economy. Trade affects direction through its impact on expected market size for an invention, leading two-way relationship between technology absent standard quantitative Ricardian models. Following theory-consistent strategy estimate extent endogenous adjustments technology, I find that they account about half observed variance comparative advantage production sample 29 countries 18 manufacturing industries. In addition, suggests models overestimate reductions real income from increases costs underestimate rise due liberalizations. (JEL F11, F14, L60, O31, O32)