R&D-Based Models of Economic Growth Reconsidered

In this paper, we analyze the optimal allocation of labor between the final goods sector and the research and development (R&D) sector within the context of a model of economic growth. Conventional R&D-based growth models often assume that the duration of a patent is perpetual. Actual patents, however, are valid for a finite period. Therefore, the conclusions drawn from conventional models require some degree of caution. We examine a more realistic model with a finite duration for patents. Our model implies that if the duplication of research efforts is very likely to occur, then the share of labor devoted to R&D in a decentralized economy is always below the socially optimal level. When research duplication is not very likely to occur, there is also the possibility that the share of labor devoted to R&D in a decentralized economy could exceed the socially optimal level.