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

• Published in: Journal of economics (Vienna, Austria) Vol. 108; no. 1; pp. 1 - 33
• Main Author: Gil, Pedro Mazeda
• Format: Journal Article
• Language: English
• Published: Vienna Springer-Verlag 01-01-2013; Springer Vienna; Springer Nature B.V
• Subjects: Consumer economics; Consumption; Economic expectations; Economic growth; Economic growth models; Economic growth rate; Economic theory; Economic Theory/Quantitative Economics/Mathematical Methods; Economic transitions; Economics; Economics and Finance; Equilibrium; Game Theory; Growth models; Innovations; Intermediate goods; Investor behavior; Macroeconomics/Monetary Economics//Financial Economics; Microeconomics; Modeling; Population growth; Public Finance; R&D; Research & development; Social and Behav. Sciences; Stochastic models; Studies; Sunspots; Technological innovation; Transitional economies; L16; D43; Time-varying speed of transition; Animal spirits; Endogenous growth; E32; Horizontal and vertical R&D; O41
• ISSN: 0931-8658; 1617-7134
• DOI: 10.1007/s00712-012-0266-8

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.