What Causes Over‐Investment in R&D in Endogenous Growth Models?

21 Pages Posted: 10 Dec 2014

Date Written: December 2014


Endogenous growth models may exhibit either under or over‐investment in R&D. The possibility of over‐investment is generally attributed to a business stealing effect that arises as the latest innovator destroys and/or appropriates previous incumbent's rents. We argue that this conventional wisdom is misleading. In standard models, business stealing by itself cannot result in excessive R&D. We explain the other effects that must be at work here, thus contributing towards a better understanding of when and why the market may be biased towards excessive R&D.

Suggested Citation

Denicolo, Vincenzo and Zanchettin, Piercarlo, What Causes Over‐Investment in R&D in Endogenous Growth Models? (December 2014). The Economic Journal, Vol. 124, Issue 581, pp. 1192-1212, 2014, Available at SSRN: https://ssrn.com/abstract=2536178 or http://dx.doi.org/10.1111/ecoj.12132

Vincenzo Denicolo (Contact Author)

University of Bologna ( email )

Strada Maggiore 45
Bologna, 40125

Piercarlo Zanchettin

University of Leicester ( email )

Department of Economics
Leicester, LE1 7RH
United Kingdom

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