ABSTRACT. We construct a competitive model of innovation and growth
under constantreturns to scale. Previous models of growth under constant
returns cannot model technological innovation. Current models of
endogenous innovation rely on the interplay between increasing returns
and monopolistic markets. We argue that ideas have value only insofar as
they are embodied in goods or people, and that there is no economic justification
for the common assumption that ideas are transmitted through
costless “spillovers.” In the absence of unpriced spillovers, we argue that
competitive equilibrium without copyrights and patents fails to attain the
first best only because ideas are indivisible, not because of increasing returns.
Moreover, while it may be that indivisibility results in socially
valuable ideas failing to be produced, when new ideas are built on old
ideas, government grants of intellectual monopoly may lead to even less
innovation than under competition. The theory of the competitive provision
of innovations we build is important both for understanding why in
many current and historical markets there has been thriving innovation in
the absence of copyrights and patents, and also for understanding why, in
the presence of the rent-seeking behavior induced by government grants
of monopoly, intellectual property in the form of copyrights and patents
may be socially undesirable.
