Introduction
Part 0: Three paradigms for
analyzing growth policy
• AK paradigm:
Yt  AK t
K t  sYt  K t
g  sA  

• 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:
●
• Product variety paradigm (continued):
 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
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 Relationships
Table 1
Dependent variable: Expenditure on research universities per person in cohort, $2004
State's members in U.S. House Appropriations Committee
State's members in U.S. Senate Appropriations Committee
Percent vote for Democratic candidate, last presidential election
Percent vote for third party candidate, last presidential election
Percent vote for Democratic candidates, last Congressional election
Percent vote for third party candidates, last Congressional election
State indicator variables
Cohort indicator variables
Census Division linear time trends
Coefficient
Robust Standard Error
597.20
419.50
-36.27
-152.50
-22.49
-40.44
yes
yes
yes
173.27
113.42
11.65
24.83
5.13
8.64
F-statistic joint significance of excluded instruments
10.32
Overall R-squared
0.96
Observations (48 states, 1947-1972 birth cohorts)
1248
All 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
Expenditure (thousands) on 4-year colleges per person in cohort
Expenditure (thousands) on 2-year colleges per person in cohort
Expenditure (thousands) on elementary & secondary public education per person in cohort
0.093
-0.198
0.474
-0.130
Effects at the frontier
Expenditure (thousands) on research universities per person in cohort
Expenditure (thousands) on 4-year colleges per person in cohort
Expenditure (thousands) on 2-year colleges per person in cohort
Expenditure (thousands) on elementary & secondary public education per person in cohort
0.269
0.057
-0.055
-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