Essays on Innovation and Growth

Abstract

This dissertation is composed of three essays on economic growth. The first chapter presents a new multi-sector growth model that accommodates long-run demand and supply drivers of structural change. The model generates nonhomothetic Engel curves at all levels of development and is consistent with the decline in agriculture, the hump-shaped evolution of manufacturing and the rise of services over time. The economy converges to a constant aggregate growth rate that depends on sectoral income elasticities, capital intensities and rates of technological progress. The chapter also presents estimates for the demand system derived from the model using historical data on sectoral employment shares from twenty-five countries and household survey data from the US. The estimated model parsimoniously accounts for the broad patterns of sectoral reallocation observed among rich, miracle and developing economies in the post-war period. We find that income effects play a major role in generating structural change. The second chapter develops a multi-sector endogenous growth model in which the direction of innovation across sectors is endogenous. The model provides a theoretical general equilibrium framework for studying the classical demand-pull and technology-push drivers of innovation. A robust prediction is that the rate of growth innovation growth is asymptotically higher in more income-elastic sectors. The chapter also provides a test of this prediction using the universe of U.S. patents and firm R&D investments for the period 1976-2007. The analysis lends empirical support for the main predictions of the model. Finally, the third chapter constructs a theory of industry growth to study the implications of knowledge diffusion and selection for innovation policy. Firms' ideas determine their productivity and stochastically evolve over time. Firms innovate to improve their ideas and endogenously exit if unsuccessful. Entrants adopt the ideas of incumbents. In this model, creative destruction operates through selection: when better ideas are innovated or adopted, they selectively replace worse ideas. Innovation externalities vary based on firm productivity: ideas generated by more productive firms create 1) longer-lasting positive externalities due to knowledge diffusion and 2) stronger negative externalities due to dynamic competition effects. Therefore, the net external effect of innovation is heterogeneous across firms. Quantitatively, this heterogeneity is large when the model is calibrated to firm-level data from US manufacturing and retail trade, and implies first-order considerations for the design of innovation policy.