Rent protection as a barrier to innovation and growth

• Published in: Economic theory Vol. 32; no. 2; pp. 309 - 332
• Main Authors: Dinopoulos, Elias, Syropoulos, Constantinos
• Format: Journal Article
• Language: English
• Published: Heidelberg Springer 01.08.2007; Springer Nature B.V
• Subjects: Brand loyalty; Economic growth; Economic growth models; Economic growth rate; Economic models; Economic rent; Economic resources; Economic theory; Endogenous; Growth models; Growth rate; Growth theory; Incumbency; Incumbents; Innovation diffusion; Innovations; Intellectual property; Interest groups; Interest rates; Inventions; Inventors; Legal fees; Licenses; Litigation; Manufacturing; Monopolies; Monopolistic competition; Population growth; Product development; Product innovation; Production capacity; R&D; Rent-seeking; Rents; Research & development; Research & development expenditures; Research and development; Schumpeterian growth; Steady state economies; Studies; Subsidies; Technological change; Technological innovation
• ISSN: 0938-2259; 1432-0479
• DOI: 10.1007/s00199-006-0124-4

We build a model of R&D-based growth in which the discovery of higher-quality products is governed by sequential stochastic innovation contests. We term the costly attempts of incumbent firms to safeguard the monopoly rents from their past innovations rent-protecting activities. Our analysis (1) offers a novel explanation of the observation that the difficulty of conducting R&D has been increasing over time, (2) establishes the emergence of endogenous scale-invariant long-run innovation and growth, and (3) identifies a new structural barrier to innovation and growth. We also show that long-run growth depends positively on proportional R&D subsidies, the population growth rate, and the size of innovations, but negatively on the market interest rate and the effectiveness of rent-protecting activities.