Patent Ladder in an Endogenous Growth Model

A dynamic general equilibrium model is developed to solve some empirical puzzles in the standard endogenous growth literature. The empirical data show that the growth rate of per capita output, and the patent rate or the rate of new invention, are constant, but research and development (R&D) expenditures, and the number of scientists and researchers are exponentially growing. This contradicts the main implications of endogenous growth models, which mean that scale effects exist. A model is developed to explain this empirical puzzle. The growth rate is made to depend only upon the productivity parameter in the invention production function, and the share parameter between the labor and the aggregate capital in the final good production. The scale effects are removed. The policy of subsidizing invention production can make the economy grow faster. However, the effect on welfare depends on whether negative externality, rent seeking, or market structure effects are stronger. Subsidies to the purchase of intermediate goods or to investment expenditures do not have any growth effects.