Macro chapter 10 r and d fundamentals summary

Final remarks
One conclusion that stands out from this chapter is that the last 20 years of 'new growth
theory' (the R&D-based theories of endogenous growth) have highlighted the economic
incentive mechanisms that underlie private research and development and economic
growth. Consequently, the potential eflects of structural policies meant to iniluence and
improve the incentives for research and development have come to the forefront of the
debate over economic policies. The debate over whether, to what extent, and by which
means society should try to stimulate private R&D is far from settled.
10.5 Summary
1. This chapter has studied the microeconomics of private idea (R&D) production. The fact that
ideas are non-rival implies that to induce private R&D, market power is needed in the selling
of ideas and idea-based products. Otherwise the fixed development cost cannot be covered.
The fact that ideas are only imperfectly excludable necessitates some arrangements to
increase excludability and prevent copying in order for private production to take place.
2. Patent laws as well as other legal ru les for the protection of intellectual property rights can
serve the double purpose of ensuring both excludability and monopoly in the production and
sell ing of dea·based products. This way of obtaining private R&D activities is, however,
imperfect. Ensuring monopoly power to the sellers of ideas implies that ideas are priced
above marginal cost and therefore, from a social viewpoint, underutilized.
3. Even though a patent system is not a perfect way of ensuring private research and develop·
ment, it is effective in the sense that much more private R&D will take place in the presence
than in the absence of laws that protect intellectual property rights. According to some
economic historians, the unprecedented economic growth during the last 200 years is partly
due to the fact that the legal protection of intellectual property rights reached a critical level
some two centuries ago.
4. We considered private idea production in a fo rmal model explicitly accounting for the non-rival
character of ideas and the economic problems associated with non-rivalry. Our main con·
elusions were: stronger competition in the sell ing of idea-based products tends to lower the
R&D share, and a higher propensity to save and invest tends to increase it.
5. The policy implications of the first conclusion (with respect to competitiveness) were not too
clear. A policy to ensure more market power would, according to our model, increase R&D
and therefore result in more ideas being produced, but would also imply a stronger over·
pricing and underutilization of ideas. It therefore seemed better, if one wants to stimulate
private research, to subsidize research somehow. However, subsidies or tax privileges to
specific activities always raise the issue of abuse and the problem of targeting the incentives
at socially beneficial activities which would not have been undertaken in the absence of the
subsidies. Suddenly the canteen belongs to the research department.
6. The second conclusion (with respect to the influence of the propensity to save) had the
implication that policies meant to increase savings and investment rates became (even) more interesting than when based on models of exogenous growth, since such a policy would have
a permanent positive effect on growth, not just on the level of the long-run growth path. One
should remember, however, that the assumption of ¢ close to 1 is required for having very
long lasting effects on growth of increased savings.

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