Process spillovers and growth

This paper develops an R&D based endogenous growth model in which the firm’s free-riding behavior, prompted by an incomplete technological protection at the industry level, can drive economic growth. Unlike existing endogenous growth models, it shows how free-riding behavior and process spillovers can mutually promote dynamic competition at the industry level and how they constitute a major source of growth in the economy. In the dynamic general equilibrium model that we propose, the representative industry is a duopoly that consists of a leader who innovates and a laggard who freerides by exploiting the source of intra-industry spillover. The main results show that the innovation strategies of the two firms can be dynamically strategic complements if a large technology gap prevails and that a fall in the level of technological protection can enhance economic growth.