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INCREASING RETURNS TO SCALE, PRICE DISPERSION, AND THE DISTRIBUTION OF RETURNS TO INNOVATION

Published online by Cambridge University Press:  31 January 2014

Michael D. Makowsky  and
David M. Levy
Michael D. Makowsky*
Affiliation:
Johns Hopkins University
David M. Levy
Affiliation:
George Mason University
*
Address correspondence to: Michael D. Makowsky, 5801 Smith Avenue, Davis Building, Suite 3220, Baltimore, MD 21209, USA; e-mail: mmakowsky@jhu.edu.
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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

PatentsEndogenous GrowthIncreasing Returns to ScalePrice DispersionSearchHeterogeneous Agents
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Issue 2 , March 2015 , pp. 334 - 362
Copyright
Copyright © Cambridge University Press 2014 

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