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Specialization, Knowledge Dilution, and Scale Effects in an IO-Based Growth Model

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  • Peretto, Pietro
  • Smulders, Sjak
Abstract
We present a model where accumulation on non-rival knowledge drives growth but where the scale effect, which may be positive or negative, vanishes asymptotically. This result stems from the interaction between technological differentiation and market structure dynamics. Firms are linked to each other in networks of spillovers determined by the technological proximity of their activities. These spillovers-networks span only a fraction of the total economy and the average technological distance between firms increases with the size of the economy. When the economy expands, less related activities become profitable and specialization increases. As a result, the networks expand at a slower pace than the overall economy. In the limit, the networks cease to grow with the size of the economy. A larger economy, therefore, accumulates a larger tock of total knowledge but not necessarily a larger effective stock of knowledge that is useful to the individual firm. The reason is that the latter expands with the size of the network to which the firm belongs. The scale effect vanishes asymptotically because the stock of effective knowledge that each firm exploits is unrelated to the size of the economy when this is very large.

Suggested Citation

  • Peretto, Pietro & Smulders, Sjak, 1998. "Specialization, Knowledge Dilution, and Scale Effects in an IO-Based Growth Model," Working Papers 98-07, Duke University, Department of Economics.
    • Handle: RePEc:duk:dukeec:98-07
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    Cited by:

    1. Tse, Chung Yi, 2002. "The diffusion of knowledge and the productivity and appropriability of R&D investment," Journal of Economic Dynamics and Control, Elsevier, vol. 26(2), pages 303-331, February.
    2. Jan Bonenkamp & Martijn van de Ven, 2006. "A small stochastic model of a pension fund with endogenous saving," CPB Memorandum 168.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    3. Peretto, Pietro F., 1999. "Industrial development, technological change, and long-run growth," Journal of Development Economics, Elsevier, vol. 59(2), pages 389-417, August.
    4. Nahuis, R., 1998. "The Dynamics of a General Purpose Technology in a Research and Assimilation Model," Other publications TiSEM 001a5f0f-16ac-4e0a-957c-8, Tilburg University, School of Economics and Management.
    5. Bas Straathof & Gert Jan Linders & Arjan Lejour & Jan Möhlmann, 2008. "The internal market and the Dutch economy: implications for trade and economic growth," CPB Document 168.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    6. Roger Smeets & Albert de Vaal, 2011. "Knowledge diffusion from FDI and Intellectual Property Rights," CPB Discussion Paper 168.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    7. Thompson, Peter, 1999. "Rationality, rules of thumb, and R&D," Structural Change and Economic Dynamics, Elsevier, vol. 10(3-4), pages 321-340, December.
    8. Alberto BUCCI, 2002. "Market Power, Human Capital and Growth," LIDAM Discussion Papers IRES 2002012, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).

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