Introduction

Part 0: Three paradigms for analyzing growth policy

• AK paradigm:

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• AK paradigm:

a “one-size-fits-all” approach to growth

→ applies to frontier countries and to countries far below the frontier

• Schumpeterian paradigm:

• Schumpeterian paradigm (continued):

• Schumpeterian paradigm (continued):

• Product variety paradigm:

●

as in Schumpeterian model, equilibrium R&D and innovation rates result from a research arbitrage equation

but only one kind of innovation, always resulting in the same kind of new product

→ hard to distinguish between frontier innovation and implementation

in fact, hard to talk about technology frontier, distance to frontier, appropriate policy favoring one or another kind of innovation

no role for exit and turnover

• Product variety paradigm (continued):

Part 1: Entry and Exit

• Debate in Europe between:

• What do the three paradigms say about entry/exit and growth?

Entry and Exit in the Schumpeterian Model

when innovation takes place step by step, then increased entry (threat):

→ induces firms close to the frontier to invest more in order to escape entry

→ discourages firms far below the frontier from investing in innovation

Entry and Exit in the Schumpeterian Model (continued)

→ exit can be positively correlated with growth as it results from more productive firms

replacing lower-performing incumbents

Figure 1: Entry and TFP growth near and further behind the technological frontier:

Table A1: Foreign expansion, plant exit in supplying industries, and TFP growth of domestic incumbents:

• Taking stock :

Part 2: Education

Is the European education system growth-maximizing?

• Appropriate Education Systems:

• Education and growth cross-US states: (Aghion-Boustan-Hoxby-Vandenbussche, 2005)

Case Study: Alabama (Lister Hill)

• Data:

First-Stage RelationshipsTable 1Dependent variable: Expenditure on research universities per person in cohort, $2004

Coefficient Robust Standard Error

State's members in U.S. House Appropriations Committee 597.20 173.27State's members in U.S. Senate Appropriations Committee 419.50 113.42Percent vote for Democratic candidate, last presidential election -36.27 11.65Percent vote for third party candidate, last presidential election -152.50 24.83Percent vote for Democratic candidates, last Congressional election -22.49 5.13Percent vote for third party candidates, last Congressional election -40.44 8.64State indicator variables yesCohort indicator variables yesCensus Division linear time trends yes

F-statistic joint significance of excluded instruments 10.32Overall R-squared 0.96Observations (48 states, 1947-1972 birth cohorts) 1248All explanatory variables are recorded for period when cohort could naturally attend graduate school: age 22 to 25

Results: Educ. investment measured by spending; migration allowed

Effects at 0.25 of the frontier (distant states) Expenditure (thousands) on research universities per person in cohort 0.093 Expenditure (thousands) on 4-year colleges per person in cohort -0.198 Expenditure (thousands) on 2-year colleges per person in cohort 0.474 Expenditure (thousands) on elementary & secondary public education per person in cohort -0.130

Effects at the frontier Expenditure (thousands) on research universities per person in cohort 0.269 Expenditure (thousands) on 4-year colleges per person in cohort 0.057 Expenditure (thousands) on 2-year colleges per person in cohort -0.055 Expenditure (thousands) on elementary & secondary public education per person in cohort -0.206

• Taking stock:

Conclusion:

• Unlike AK and the product variety model, the Schumpeterian growth paradigm produces testable predictions as to how: competition/entry/exit the allocation of education funding macropolicy

should affect growth, and differently so according to the country’s or sector’s distance to frontier