Speculative Profits, Innovation, and Growth

15 Pages Posted: 21 Nov 2016

Date Written: January 2017

Abstract

When technological change affects the prices of tradeable assets, innovators can obtain speculative profits by exploiting their inside information as to the occurrence of innovations. We propose a tractable model of endogenous growth that formalizes this argument, originally due to Hirshleifer (1971). We then use the model to assess two claims advanced by Hirshleifer, namely, that speculative profits can generate excessive investment in R&D when they add to monopoly rents guaranteed by patent protection, or else even in a perfectly competitive economy. The analysis confirms the first claim, but casts doubts on the second one.

JEL Classification: O30, O40

Suggested Citation

Denicolo, Vincenzo and Zanchettin, Piercarlo, Speculative Profits, Innovation, and Growth (January 2017). Economic Inquiry, Vol. 55, Issue 1, pp. 160-174, 2017, Available at SSRN: https://ssrn.com/abstract=2872443 or http://dx.doi.org/10.1111/ecin.12375

Vincenzo Denicolo (Contact Author)

University of Bologna ( email )

Strada Maggiore 45
Bologna, 40125
Italy

Piercarlo Zanchettin

University of Leicester ( email )

Department of Economics
Leicester, LE1 7RH
United Kingdom

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