On the Direction of Innovation

How are resources allocated across different R&D areas (i.e., problems to be solved)? As a result of dynamic congestion externalities, the competitive market allocates excessive resources into those of high return, being those with higher private (and social) payoffs. Good problems are tackled too soon, and as a result the distribution of open research problems in the socially optimal solution stochastically dominates that of the competitive equilibrium. A severe form of rent dissipation occurs in the latter, where the total value of R&D activity equals the value of allocating all resources to the least valuable problem solved. Resulting losses can be substantial.

• Publication year

  2021

• Venue

  Journal of Political Economy

• Publication date

  2021-02-24

• Fields of study

  Economics

• Identifiers
  DOI 10.1086/714093
• External record

  Open on Semantic Scholar

• Source metadata

  Semantic Scholar

• No claims are published for this paper.

• No concepts are published for this paper.

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