Journal of Economics

, Volume 108, Issue 1, pp 1–33 | Cite as

Animal spirits and the composition of innovation in a lab-equipment R&D model with transition

Article

Abstract

We study the effect of animal spirits on the composition of aggregate R&D, the consumption level and economic growth in a tournament model of horizontal and vertical R&D. By considering a full lab-equipment specification, the model predicts a positive effect of animal spirits on the balanced-growth-path (BGP) level of per-capita consumption without impacting on economic growth and on aggregate vertical R&D. However, transition is slower under “waves of enthusiasm”, implying a longer period in which growth rates are higher than the BGP level. An economy that is subject to expectations shocks then converges at a time-varying speed. On average over time, transition is longer but less “painful”—i.e., with higher per-capita consumption levels—than otherwise.

Keywords

Animal spirits Endogenous growth Horizontal and vertical R&D Time-varying speed of transition 

JEL Classification

O41 E32 D43 L16 

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Copyright information

© Springer-Verlag 2012

Authors and Affiliations

  1. 1.Faculty of EconomicsUniversity of Porto, and CEF.UP.PortoPortugal

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