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Love of Novelty: A Source of Innovation-Based Growth... or Underdevelopment Traps?

Furukawa, Yuichi and Lai, Tat-kei and Sato, Kenji (2019): Love of Novelty: A Source of Innovation-Based Growth... or Underdevelopment Traps?

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Abstract

This study develops a new dynamic general equilibrium model to explore the role of people's love of novelty in innovation and innovation-based growth. The model considers (a) an infinitely lived representative consumer who has standard love-of-variety preferences for differentiated products and additional love-of-novelty preferences for new products, and (b) technological progress driven by two costly and time-consuming innovation activities, new product development and existing product development. We demonstrate that consumer love of novelty is a source of innovation-based growth, in the sense that economies with a moderate love of novelty can achieve innovation and long-run growth through cycles between periods in which new product development is active and those in which existing product development is active. However, if the preference for novelty is too strong---or too weak---the economy is caught in an underdevelopment trap with less innovation and no long-run growth. Our results suggest that the love of novelty is a source of innovation-based growth, but it can lead to an underdevelopment trap if it is too strong, according to recent empirical evidence.

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