A rivalrous good is one which when consumed by one person prevents or restricts the use of that good by another. Such as a cup of coffee. An excludable good is one that the owner of the good can prevent others from using or enjoying. Such as a movie.
Romer suggests technicalogical growth is endogenous in the model because the market is affected by people who respond to incentives, ie. higher personal reward, and allocate their human capital accordingly.
Put simply, if the expected return from undertaking research is less than working in the final goods or production sector, human capital (which Romer argues is a key input in endogenous economic growth) will be diverted from research to final goods sector. Non-rival, partially excludable goods support endogenous economic growth and encourage human capital investment in research. The non-rival aspect means one person’s use of the asset doesn’t naturally prevent/restrict another’s and the partially excludable part means that the entity can somewhat prevent others from taking advantage of their design. The non-excludable part is a positive externality that contributes to society and can encourage endogenous economic growth, the excludable part of the good creates an incentive for firms to conduct research (their rights/profit stream has some protection) and this incentivises undertaking research which creates economic growth.
Human capital is rivalrous and tied to the human who has attained the capital. The individual cannot be in 2 places at once, engaged in solving many problems at once. Hence by that person undertaking one task they are restricting/preventing the access of the good (human capital) to other parties.
That we should theoretically be able to re-produce exactly what we have already done separately & in the exact same manner as previously. It will therefore be ‘replicated’ and we would expected the same return on inputs and our returns to scale should be the same as before. This is constant returns to scale.
He is arguing that replication is not optimal if a non-rival input has productive value, it is better to put all resources into a singular project and make it as efficient as possible rather than exactly replicate the project a number of times. The additional workers in the research stage, an input, would be expected to produce a more efficient design and when the design flows through the other stages of production the units produced per input is hence greater. Romer contends this type of input actually has increasing-returns-to scale represented by F(lambaA, lambdaX), which is greater than the replication argument F(A, lambdaX). Here marginal product is increasing, in constant returns to scale it’s constant.
The benefits or profits cannot be fully captured by the researcher, once the knowledge is published, sold, patented or shared other researchers can benefit from the knowledge and build upon it rather than have to discover it for themselves. So the patent or license can exclude people from using the design itself but once it is in the market it can be mimicked or used for inspiration by others by simply obtaining one of the goods, studying it and learning from it. Rather like the USSR did with its technical progress in the 1930’s. It bought tractors from the Western countries and pulled them apart to figure out how to make them.
Knowledge can be patented, licensed or have intellectual property protection and this allows them to somewhat exclude other parties and make profits in the intermediate goods market on successful designs. However they are not able to capture the full marginal value of their design as designs are only partially excludable, other entities can study the designs and use them for inspiration/mimick them. This can divert some of the benefits of the design away from the first mover (designer) and hence designers may not realise the true or full marginal value of a design.
** What is the impact of a reduction in the interest rate on the value of ideas, and on research? Do you see this in the data?** When interest rates are low, as they are right now the opportunity cost of investing in research is lower as the yield on monies invested in fixed interest deposits/bonds is lower.
The data is the article on investment in Australian agriculture shows a decline since the 1960’s. With increased food security and technology ‘spill overs’ to developing countries agricultural production, the benefit or profit from engaging in agricultural research in Australia is low. The cost of undertaking the research is less than the yield from the final goods production market.
http://www.futuredirections.org.au/publications/food-and-water-crises/1885-declining-research-and-development-investment-a-risk-for-australian-agricultural-productivity.html However with an increase in food security awareness due to global warming research in agricultural productivity and diversity should increase.
** What is the impact on the returns to research of an increase in the population? Why?** Assuming the ratio of people devoting human capital to research in the economy does not change, a permanent increase in the population growth rate will increase the amount of human capital available, resulting in an increase in the level of steady state human capital devoted to research and the rate of technical change as more people engage in research.
It’s important to note that this increase in growth is caused by the additional human capital devoted, not just more people being added to the society (they could just sit around and not do anything).
What is the impact of an increase in the stock of human captial on the returns to research? Why?
Romer contends scale is an important determinant of economic growth and that human capital is the correct measure for this variable and hence the rate of growth, not population. As human capital increases the research undertaken and the returns on research will increase, this is represented by HY in the equation Y(HY, L, x) = (H^Y subscriptalpha) (L^beta) (summation^infinity subscripti=1 *x subscripti)^(1-alpha-beta) . This point is re-enforced through via Romer’s model by the substantive assumptions he made. Allocating more human capital to research increases production of new ideas/improved ideas/technology and the larger the stock of ideas/knowledge the more productive a researcher in the relevant sector will be.
Savageland, a new country founded by Jim, is negotiating trade relationships with Malaysia (Population 30.5m) and Singapore (population 5.5m). Both countries have about the same GDP. Which trade relationship would be expected to have a larger impact on returns to research? Why?
The relationship that would yield greater greater returns to research would be the economy with a large amount of human capital, not the economy with a larger population as the sharing of this human capital will increase the productivity of research and stock of new ideas being developed.
So Singapore with its markets closely integrated with world markets will yield Savageland the biggest impact on research. Romer’s model suggests that population size or density has no effect on human capital devoted to research. Malaysia has less integrated markets, a higher population and less reliable institutions. The provision for human capital is research will be lower in Malaysia as a result. The trade relationship with Malaysia will have a lesser impact on returns to research.
Romer contends that research is under-funded by human capital (there’s too little) for two reasons. Firstly positive externalities are present as the owner cannot prevent (exclude) others from using the designs during their research endeavours. Secondly the research is purchased by a sector that prices like a monopoly (marginal revenue = marginal cost) and therefore the research provided (the good/service) is less than the socially optimal (or competitive) amount.