Increasing Returns to Scale, Price Dispersion, and the Distribution of Returns to Innovation

39 Pages Posted: 15 Apr 2010 Last revised: 4 Jan 2013

See all articles by Michael D. Makowsky

Michael D. Makowsky

Clemson University - John E. Walker Department of Economics

David M. Levy

George Mason University - Center for Study of Public Choice

Date Written: January 3, 2013

Abstract

Models of endogenous growth have not been able to account for the variety of empirically observed distributional properties of the returns to innovation, in part, because of the limitations necessarily imposed on competition to cope with increasing returns to scale. Exponential growth, fat tails, Pareto-Levy distributed upper tails, and upper value outliers, are associated with increasing returns to scale and innovation. At the same time, properties such as bifurcated research investment strategies, bimodal returns to innovation, and Laplace distributed firm growth rates are products of competition. We build an agent-based model of endogenous technical change in which heterogeneous investments in patented knowledge and increasing returns to scale emerge these distributional properties within a competitive market. The combination of heterogeneous agents, costly information, and patents allow for a competitive landscape to persist amidst increasing returns. The ability of model to foster a coexistence of competition and increasing returns underlies the observed distributional properties.

Keywords: Patents, Endogenous Growth, Increasing Returns to Scale, Price Dispersion, Search, Heterogeneous Agents

JEL Classification: C63, L11, O33, D83

Suggested Citation

Makowsky, Michael D. and Levy, David M., Increasing Returns to Scale, Price Dispersion, and the Distribution of Returns to Innovation (January 3, 2013). Available at SSRN: https://ssrn.com/abstract=1588462 or http://dx.doi.org/10.2139/ssrn.1588462

Michael D. Makowsky (Contact Author)

Clemson University - John E. Walker Department of Economics ( email )

Clemson, SC 29634
United States

HOME PAGE: http://michaelmakowsky.com

David M. Levy

George Mason University - Center for Study of Public Choice ( email )

MSN 1d3 Carow Hall
4400 University
Fairfax, VA 22030
United States

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