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The authors provide the first theoretical analysis of a one sector, discrete time, Schumpeterian model of growth in a regional economy in which consumers are risk neutral, there is no population growth, monopolistic entrepreneurs produce intermediate goods, and a single consumption good is produced competitively. Their analysis generates several new results. In the deterministic model, R&D in time t surely leads to an innovation in time t+1. In this setting, they show that relative to the Balanced Growth Path (BGP) equilibrium, the social planner always allocates more labor to R&D and hence achieves a larger size of innovation and a higher growth rate.
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