Endogenous Recombinant Growth through Market Production of Knowledge and Intellectual Property Rights

We analyze the relationship between economic growth, knowledge production and intellectual property rights. Economists and historians underline different aspects as possible causes of knowledge accumulation; the former stress the role of incentive mechanisms while the latter the autonomous progress of science. We construct a unified theory allowing for the presence of markets and the autonomous accumulation of knowledge by introducing intellectual property right policies in an endogenous recombinant growth model. In this framework a benevolent government should reallocate resources from the final to the knowledge production sector and implement a tax-subsidy scheme in order to correct for the inefficiencies generated by the process. We characterize the (asymptotic) steady state equilibrium, and some properties of the transitional path. We show that if certain conditions are met, then the economy will converge to its (asymptotic) balanced growth path, and along such a path growth will be independent of the government policy; conversely, transition dynamics and the capital to knowledge ratio are affected by the choice of the tax-subsidy parameter. We then quantitatively analyze the effect of different policy interventions on welfare, and show that welfare is increasing in the policy parameter and a strictly positive policy level may be required to avoid stagnation. JEL Classification Numbers: K11; L16; L43; O31; O34; O41