The Lindahl Equilibrium in Schumpeterian Growth Models: Knowledge Diffusion, Social Value of Innovations and Optimal R&D Incentives

Abstract

What is the social value of innovations in Schumpeterian growth models? This issue is tackled by introducing the concept of Lindahl equilibrium in a standard endogenous growth model with vertical innovations which is extended by explicitly considering knowledge diffusion on a Salop (1979) circle. Completing markets by pricing knowledge allows us to compare the private value of innovations with the social one. This comparison sheds a new light on the consequences of non-rivalry of knowledge and of market incompleteness on innovators’ behavior. Then, we notably revisit the issues of Pareto sub-optimality and of R&D incentives in presence of cumulative innovations.

Keywords: Schumpeterian growth theory, Lindahl equilibrium, social value of innovations, Pareto sub-optimality, cumulative innovations, knowledge spillovers

JEL Classification: D520, O310, O330, O400, O410