Specialization, Knowledge Dilution, and Scale Effects in an Io-Based Growth Model

Duke Economics Working Paper No. 98-07 and CentER Working Paper

29 Pages Posted: 28 Jan 1999

See all articles by Pietro F. Peretto

Pietro F. Peretto

Duke University - Department of Economics; Duke Innovation & Entrepreneurship Initiative

Sjak Smulders

Tilburg University - Tilburg University School of Economics and Management; University of Calgary - Department of Economics

Date Written: 1998

Abstract

We present a model where accumulation on non-rival knowledge drives growth but where the scale effect, which may be positive or negative, vanishes asymptotically. This result stems from the interaction between technological differentiation and market structure dynamics. Firms are linked to each other in networks of spillovers determined by the technological proximity of their activities. These spillovers-networks span only a fraction of the total economy, and the average technological distance between firms increases with the size of the economy. When the economy expands, less related activities become profitable and specialization increases. As a result, the networks expand at a slower pace than the overall economy. In the limit, the networks cease to grow with the size of the economy. A larger economy, therefore, accumulates a larger stock of total knowledge but not necessarily a larger effective stock of knowledge that is useful to the individual firm. The reason is that the latter expands with the size of the network to which the firm belongs. The scale effect vanishes asymptotically because the stock of effective knowledge that each firm exploits is unrelated to the size of the economy when this is very large.

JEL Classification: O40

Suggested Citation

Peretto, Pietro F. and Smulders, Jacobus (Sjak) A., Specialization, Knowledge Dilution, and Scale Effects in an Io-Based Growth Model (1998). Duke Economics Working Paper No. 98-07 and CentER Working Paper. Available at SSRN: https://ssrn.com/abstract=137987 or http://dx.doi.org/10.2139/ssrn.137987

Pietro F. Peretto

Duke University - Department of Economics ( email )

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Duke Innovation & Entrepreneurship Initiative ( email )

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Jacobus (Sjak) A. Smulders (Contact Author)

Tilburg University - Tilburg University School of Economics and Management ( email )

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Tilburg, 5000 LE
Netherlands
+31 13 466 2920 (Phone)
+31 13 466 3042 (Fax)

HOME PAGE: http://www.uvt.nl/webwijs/english/show.html?anr=801585&lang=en

University of Calgary - Department of Economics ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

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