Innovation: the competitive view.

The study illustrates a competitive model of innovation and growth under constant returns to scale. Previous models of growth under constant returns cannot model technological innovation. Current models of endogenous innovation rely on the interplay between increasing returns and monopolistic markets. The authors argue that ideas have value only insofar as they are embodied in goods or people, and that there is no economic justification for the common assumption that ideas are transmitted through costless 'spillovers'. In the absence of unpriced spillovers, it is argued, competitive equilibrium without copyrights and patents fails to attain the first best only because ideas are indivisible, not because of increasing returns. Moreover, it may be that indivisibility results in socially valuable ideas failing to be produced, but when new ideas are built on old ideas, government grants of intellectual monopoly may lead to even less innovation than there would be under competition. The theory of the competitive provision of innovations built is important both for understanding why there has been thriving innovation in the absence of copyrights and patents in many current and historical markets, and why intellectual property in the form of copyrights and patents may be socially undesirable in the presence of the rent-seeking behaviour induced by government grants of monopoly.