Monday, March 29, 2010

Static innovation

Technical innovation is good. Monopoly is bad. What about technical innovation by a monopolist? Apparently, the literature on this uses partial equilibrium models, which is silly because general equilibrium effects can be quite important. In particular, it is not necessarily the case that whatever resources the monopolist requires after innovation are a net loss for the rest of the economy. Aggregate capital accumulation may be different, for example.

Shuntian Yao and Lydia Gan thus address the question with a model of R&D where production requires capital, there is a monopolist and a competitive sector, all this in general equilibrium, But the model is static. That is right, the process of innovation is static, innovation just happens spontaneously, and costlessly, I should add. The same applies to capital which drops from the sky when required.

Now, isn't there a literature that has general equilibrium in a dynamic setting? Yes there is: endogenous growth theory, born in the 1980's, which is right after when the literature review of Yao and Gan stops. Even undergraduates know about that.

1 comment:

Agent Continuum said...

"Apparently, the literature on this use*D* partial equilibrium models"

But why pick on this working/discussion paper? There are bigger fish to fry!