Edited by Neri Salvadori and Renato Balducci
Chapter 1: Human capital, product market power and economic growth
* Alberto Bucci 1.1. INTRODUCTION Although an important theoretical research line of the research and development (R&D)-based growth literature has already investigated whether or not the presence of imperfect competition in the product market may be growth-enhancing (we discuss this literature more fully later on in this section), such an analysis has not yet been conducted within an integrated economic growth model where agents (firms and individuals) may decide to invest respectively in innovation and education activities and the growth engine is investment in human capital. This chapter aims to combine in the simplest possible way the basic Lucas (1988) model of human capital accumulation with (a version of) the Grossman and Helpman model of endogenous technical change without knowledge spillovers (1991, Ch. 3, pp. 43–57) in order to fill this significant gap in the literature. The reason why we focus on the version of the Grossman and Helpman model without knowledge spillovers is that we are interested in studying the link between product market competition and economic growth within an economy where the lever to economic development is investment in formal education, and not R&D activity. Apart from introducing explicitly human capital accumulation à la Lucas, the structure of our model economy is similar to that of the basic Grossman and Helpman approach (1991, Ch. 3). In more detail, we assume that there exist three vertically integrated sectors. A competitive final output sector produces a homogeneous consumer good. Depending on the value of a crucial parameter (the...
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