Abstract

This work introduces firm heterogeneity in a dynamic model of growth with both process and product innovations. Deliberate R&D is undertaken to create new varieties of products that contribute to welfare through consumer's love of variety. Long-run growth is fuelled by process innovations that occur in response to i) increased supply capabilities (which increase with the number of varieties of patents at the technology frontier) and ii) demand incentives (through a larger market). The growing economy is described by a succession of moving equilibria and scale effects are mitigated through the reallocation of the workforce between the R&D and production sectors.