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The impact of the distribution of property rights on inventions on growth: a two-representative-agent model with asymmetric information

He, Qichun (2011): The impact of the distribution of property rights on inventions on growth: a two-representative-agent model with asymmetric information.

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Abstract

We study how entrepreneurs and households share the monopolistic profit from inventions would affect growth. The share to the entrepreneur is called entrepreneur's inventive incentive (EII). First, there are two representative agents (a borrowing entrepreneur and a household who provides the financing capital), both making intertemporal savings decisions. Second, the two agents sign credit contracts to deal with asymmetric information. A larger EII elicits more entrepreneurs' effort, increasing the monopolistic profit from innovations (a "bigger cake" effect); it, however, leaves a smaller share of the cake to households. Initially, the former effect dominates, but beyond a point, the latter effect dominates. As the cake becomes bigger, if the creditor's share gets too small, her return (the product of the size of the cake and her share in the cake) may decrease and she would be less willing to save to finance R&D. Therefore, growth is an inverted-U function of EII.

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