From Solow to Schumpeter: a two-stage endogenous model of economic growth

Abstract

This paper studies the determinants which enable an economy to enter an innovation-driven growth stage. We present a model in which the final good is produced with labor and an intermediate good. This intermediate good is produced by default in a competitive market, but a firm can have the possibility to invest in research and development and, if successful, become the monopolist in the market for a period. Successful research generates improvements in productivity that make long term economic growth possible. We derive a condition to be met in order to initiate innovation, and additionally we analyze specific policies that may help commence innovation in an economy which originally does not meet the precedent condition.