A competitive idea-based growth model

ABSTRACT

In this paper, we present a model in which endogenous growth arises in competitive markets. Knowledge is described as a factor used directly in the final goods' production. Firms demand both basic nonrival knowledge contents, which are supplied jointly and inelastically with raw labor, and further contents supplied by patent holders. This fact, together with Lindahl prices for knowledge, allows competition to work, while it also implies that workers' income share declines overtime. In a first version of the model with constant cost of knowledge production, the first best is attained. In a further version of the model, in which the cost of knowledge production is allowed to change over time and thus intertemporal externalities arise, in a decentralized economy a second best equilibrium occurs in the transitional period, while in the long run there is convergence to efficiency.