Investment-specific R&D and the decline in the relative price of capital

The relative price of capital has declined at a rapid rate in the postwar period. This article provides a candidate explanation for this relative price decline - research and development that are embodied in new, more efficient investment goods. The model mimics the secular aspects of the data, and it has the property that the long-run growth rate of consumption is nontrivially determined as a function of the R&D efforts. Because growth is driven by investment in durable goods in the present model, it seems natural to assume that R&D is product-specific and that the firms producing these goods are long-lived profit centers that internalize the dynamic gains from R&D. A result of this assumption is that the growth rate in the decentralized economy is too low: the so-called business stealing effects that may cause the equilibrium growth rate to be too high in other models is internalized here in the form of planned obsolescence. © 1998 Kluwer Academic Publishers.