We examine the quantitative impact of policy-induced changes in firms’ innovative investment on growth in aggregate productivity and output in a model that nests several of the canonical models. We isolate two statistics, the impact elasticity of aggregate productivity growth with respect to aggregate innovative investment and the degree of intertemporal knowledge spillovers in research, that shape the model’s predicted dynamic response to a change in the innovation intensity of the economy. Given measures of these statistics, there is only modest scope for increasing aggregate productivity and output over a 20-year horizon with uniform innovation subsidies to firms’ investments in innovation of a reasonable magnitude, but the welfare gains may be substantial

We present a general equilibrium model of the decisions of firms to innovate and to engage in international trade. We use the model to analyze the impact of a reduction in international trade costs on firms ’ process and product innovative activity. We first show analytically that if all firms export with equal intensity, then a reduction in international trade costs has no impact at all, in steady-state, on firms ’ investments in process innovation. We then show that if only a subset of firms export, a decline in marginal trade costs raises process innovation in exporting firms relative to that of non-exporting firms. This reallocation of process innovation reinforces existing patterns of comparative advantage, and leads to an amplified response of trade volumes and output over time. In a quantitative version of the model, we show that the increase in process innovation is largely offset by a decline in product innovation. We find that, even if process innovation is very elastic and leads to a large dynamic response of trade, output, consumption, and the firm size distribution, the dynamic welfare gains are very similar to those in a model with inelastic process innovation

How global are the gains from innovation? When firms operate plants in multiple countries, technological improvements developed in one location may be shared with foreign sites for efficiency gain. We develop a model that accounts for such transfer and apply it to measure returns to R&D investment for a panel of US multinationals. Our estimates indicate that innovation increases performance at firm locations beyond the innovating site: the median multinational firm realizes abroad 20% of the return to its US R&D investment, revealing a spatial disconnect between the costs and potential gains of policies that encourage multinationals’ US innovation

This paper develops a dynamic general equilibrium model of economic growth. The model has a steady-state equilibrium in which some firms devote resources to discovering qualitatively improved products and other firms devote resources to copying these products. Rates of both innovation and imitation are endogenously determined on the basis of the outcomes of $R & D$ races between firms. Innovation subsidies are shown to unambiguously promote economic growth. Welfare is enhanced, however, only if the steady-state intensity of innovative effort exceeds a critical level

This paper develops a dynamic general equilibrium model of economic growth. The model has a steady-state equilibrium in which some firms devote resources to discovering qualitatively improved products and other firms devote resources to copying these products. Rates of both innovation and imitation are endogenously determined on the basis of the outcomes of $R & D$ races between firms. Innovation subsidies are shown to unambiguously promote economic growth. Welfare is enhanced, however, only if the steady-state intensity of innovative effort exceeds a critical level

We estimate an equilibrium model of dynamic oligopoly with durable goods and endogenous innovation to examine the effect of competition on innovation in the personal computer microprocessor industry. Firms make dynamic pricing and investment decisions while consumers make dynamic upgrade decisions, anticipating product improvements and price declines. Consistent with Schumpeter, we find that the rate of innovation in product quality would be 4.2 percent higher without AMD present, though higher prices would reduce consumer surplus by $12 billion per year. Comparative statics illustrate the role of product durability and provide implications of the model for other industries

This paper discusses a simulation procedure where innovations from time-series processes are used in conducting simulation experiments with macroeconometric models. A particular theoretical example using the term structure of interest rates is studied here, along with actual simulation experiments using a large macroeconometric model. This analysis illustrates the advantages of simulating with innovations and the extent to which more standard simulation procedures lead to misleading results. The innovation-simulation technique can be used to provide information on the response of the economy to shocks, even when the macroeconometric model is not invariant to policy changes. Policymakers might find such information to be quite valuable

[This paper discusses a simulation procedure where innovations from time-series processes are used in conducting simulation experiments with macroeconometric models. A particular theoretical example using the term structure of interest rates is studied here, along with actual simulation experiments using a large macroeconometric model. This analysis illustrates the advantages of simulating with innovations and the extent to which more standard simulation procedures lead to misleading results. The innovation-simulation technique can be used to provide information on the response of the economy to shocks, even when the macroeconometric model is not invariant to policy changes. Policymakers might find such information to be quite valuable

The main goal of this paper is to put forward a methodology for the measurement of product innovations using a value metric, that is, equating the "magnitude" of innovations with the welfare gains they generate. This research design is applied to the case of computed tomography scanners, a revolutionary innovation in medical technology. The econometric procedure centers on the estimation of a discrete choice model (the nested multinominal logit), which yields the parameters of a utility function defined over the changing quality dimensions of the innovative product. The estimated flow of social gains from innovation is used to compute a social rate of return to R & D, to explore the interrelation between innovation and diffusion, and to trace the time profile of benefits and costs, the latter suggesting the possible occurrence of "technological cycles

The main goal of this paper is to put forward a methodology for the measurement of product innovations using a value metric, that is, equating the "magnitude" of innovations with the welfare gains they generate. This research design is applied to the case of computed tomography scanners, a revolutionary innovation in medical technology. The econometric procedure centers on the estimation of a discrete choice model (the nested multinominal logit), which yields the parameters of a utility function defined over the changing quality dimensions of the innovative product. The estimated flow of social gains from innovation is used to compute a social rate of return to R & D, to explore the interrelation between innovation and diffusion, and to trace the time profile of benefits and costs, the latter suggesting the possible occurrence of "technological cycles