Schumpeterian growth with gradual product obsolescence

The model in this article captures several important aspects of the real world: gradual obsolescence of goods in the form of gradually declining net profit derived from each product until it is phased out, expanding variety of goods over time, and both dynamic and static internal increasing returns to scale of production. To eliminate the scale effect, Jones's specification that gives rise to a semiendogenous rate of innovation is adopted. The most interesting finding of the article is that, when the research duplication effect is small (large) relative to the intertemporal knowledge spillover effect in R&D, the decentralized market delivers insufficient (excessive) obsolescence and allocates too little (much) labor to R&D, while a small subsidy (tax) to innovation is welfare-improving. All these results hold because the positive knowledge spillover externality overwhelms (is overwhelmed by) the negative research duplication externality. © 1998 Kluwer Academic Publishers.