Innovations, Patent Races and Endogenous Growth

This paper presents a model of innovations and economic growth, which departs from earlier endogenous growth models by assuming that innovations require not only labor of innovators, but also time. Each innovation has to wait till its time comes, and speeding it up is costly. This change in assumption yields a number of important results. First, the model gives rise to patent races, where many researchers search for the same innovation. Second, the rate of growth does not rise too much with the scale of the economy. Third, R&D is Pareto-inefficient, as too many researchers look for the same breakthrough. Fourth, concentration of R&D by monopolistic firms is explained in this model by risk aversion, where patent races are internalized within one firm in order to share risk. JEL Classification: O31, O40.