Animal spirits and the composition of innovation in a lab-equipment R&D model with transition |
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Authors: | Pedro Mazeda Gil |
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Institution: | 1. Faculty of Economics, University of Porto, and CEF.UP., Rua Dr Roberto Frias, 4200-464, Porto, Portugal
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Abstract: | We study the effect of animal spirits on the composition of aggregate R&D, the consumption level and economic growth in a tournament model of horizontal and vertical R&D. By considering a full lab-equipment specification, the model predicts a positive effect of animal spirits on the balanced-growth-path (BGP) level of per-capita consumption without impacting on economic growth and on aggregate vertical R&D. However, transition is slower under “waves of enthusiasm”, implying a longer period in which growth rates are higher than the BGP level. An economy that is subject to expectations shocks then converges at a time-varying speed. On average over time, transition is longer but less “painful”—i.e., with higher per-capita consumption levels—than otherwise. |
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