Podcast
Questions and Answers
Within the Arrow's model framework, which entity possesses the LEAST incentive to innovate, considering only private incentives and neglecting potential spillover effects?
Within the Arrow's model framework, which entity possesses the LEAST incentive to innovate, considering only private incentives and neglecting potential spillover effects?
- A vertically integrated firm, capturing upstream and downstream profits.
- A firm operating in a perfectly competitive market where innovation benefits are quickly disseminated. (correct)
- A monopolist operating under conditions that ensure complete appropriation of innovation benefits.
- A central planning authority directly incorporating social welfare gains into its incentive structure.
In the context of Arrow's (1962) framework on incentives to innovate, what critical assumption, when relaxed, most significantly alters the relative incentives between a monopolist and a perfectly competitive firm?
In the context of Arrow's (1962) framework on incentives to innovate, what critical assumption, when relaxed, most significantly alters the relative incentives between a monopolist and a perfectly competitive firm?
- The assumption that innovation can be introduced by spending a lump-sum R in R&D, irrespective of initial market structure.
- The assumption of non-drastic process innovation, where $c_1 < c_0$ and $p_{monopoly}(c_1) > c_0$.
- The assumption of constant average costs for the existing technology.
- The assumption of full appropriability of innovation, wherein no imitation is possible due to infinite patent length. (correct)
Under the assumptions of Arrow's model, what is the primary reason for the potential underinvestment in innovation when left solely to the private sector?
Under the assumptions of Arrow's model, what is the primary reason for the potential underinvestment in innovation when left solely to the private sector?
- The inherent uncertainty in determining the optimal level of R&D investment.
- The excessive bureaucracy associated with managing large-scale R&D projects.
- The inability of firms to fully capture the social benefits of their innovations, generating market failures. (correct)
- The high barriers to entry in monopolistic markets prevent competitive innovation.
Within the context of Nelson’s (1959) analysis of basic research, what factor most strongly differentiates the investment decisions of large multi-product firms from those of smaller, competitive firms?
Within the context of Nelson’s (1959) analysis of basic research, what factor most strongly differentiates the investment decisions of large multi-product firms from those of smaller, competitive firms?
According to Nelson (1959), why might some countries deliberately sacrifice static efficiency to allow significant market power to large firms, particularly in the context of basic research?
According to Nelson (1959), why might some countries deliberately sacrifice static efficiency to allow significant market power to large firms, particularly in the context of basic research?
How does Nelson's (1959) argument regarding the incentives to invest in basic research differ most significantly from Arrow's (1962) perspective on innovation incentives?
How does Nelson's (1959) argument regarding the incentives to invest in basic research differ most significantly from Arrow's (1962) perspective on innovation incentives?
In the context of the chain-linked model of innovation, what is the most critical role of the feedback loops (represented by 'f' and 'F')?
In the context of the chain-linked model of innovation, what is the most critical role of the feedback loops (represented by 'f' and 'F')?
According to the chain-linked model, what condition primarily triggers the need for engaging in formal scientific research, rather than relying on existing scientific knowledge?
According to the chain-linked model, what condition primarily triggers the need for engaging in formal scientific research, rather than relying on existing scientific knowledge?
Within the framework of the chain-linked model, how does 'radical innovation' most directly contribute to the interconnected science-technology dynamic?
Within the framework of the chain-linked model, how does 'radical innovation' most directly contribute to the interconnected science-technology dynamic?
Which assertion regarding the 'Linear Model' of innovation is LEAST accurate, given modern innovation studies?
Which assertion regarding the 'Linear Model' of innovation is LEAST accurate, given modern innovation studies?
What critical element, often observed in real-world R&D ecosystems, is notably absent in the idealized assumptions underlying Arrow's 1962 analysis of innovation incentives?
What critical element, often observed in real-world R&D ecosystems, is notably absent in the idealized assumptions underlying Arrow's 1962 analysis of innovation incentives?
According to Nelson’s 1959 perspective, what is the most significant implication of 'Uncertainty' dominating R&D in basic research?
According to Nelson’s 1959 perspective, what is the most significant implication of 'Uncertainty' dominating R&D in basic research?
Within the context of innovation studies, what does the term "appropriability" specifically refer to, as it relates to private sector R&D investment?
Within the context of innovation studies, what does the term "appropriability" specifically refer to, as it relates to private sector R&D investment?
Based on the chain-linked model, how do advancements in scientific instrumentation (e.g., powerful microscopes or advanced telescopes) primarily influence the trajectory of innovation?
Based on the chain-linked model, how do advancements in scientific instrumentation (e.g., powerful microscopes or advanced telescopes) primarily influence the trajectory of innovation?
How might a central government optimally intervene to correct the underinvestment in basic research, considering the conclusions drawn from both Arrow (1962) and Nelson (1959)?
How might a central government optimally intervene to correct the underinvestment in basic research, considering the conclusions drawn from both Arrow (1962) and Nelson (1959)?
Which of the following is a primary critique of the Linear Model of innovation?
Which of the following is a primary critique of the Linear Model of innovation?
What is the main implication of the Bayh-Dole Act for university-industry collaboration in the United States?
What is the main implication of the Bayh-Dole Act for university-industry collaboration in the United States?
What is a potential drawback of countries prioritizing dynamic efficiency over static efficiency in the context of R&D?
What is a potential drawback of countries prioritizing dynamic efficiency over static efficiency in the context of R&D?
In the chain-linked model of innovation, what does the D (Direct Link) represent?
In the chain-linked model of innovation, what does the D (Direct Link) represent?
What is the role of the 'K' element of the chain-linked model?
What is the role of the 'K' element of the chain-linked model?
In the chain-linked model, what is the 'central-chain' innovation path primarily focused on?
In the chain-linked model, what is the 'central-chain' innovation path primarily focused on?
What is the difference between 'invention' and 'analytic design'?
What is the difference between 'invention' and 'analytic design'?
Why might a public planner have greater inventive incentive than a firm in a perfectly competitive industry?
Why might a public planner have greater inventive incentive than a firm in a perfectly competitive industry?
From the perspective of the chain-linked model, how does science factor into the innovation process?
From the perspective of the chain-linked model, how does science factor into the innovation process?
What is a critical assumption that Arrow makes when modeling the returns to research?
What is a critical assumption that Arrow makes when modeling the returns to research?
From the perspective of the linear model, why may research into JET fusion, mRNA, and nuclear power attract state attention?
From the perspective of the linear model, why may research into JET fusion, mRNA, and nuclear power attract state attention?
What is a potential drawback of the chain-linked model?
What is a potential drawback of the chain-linked model?
What is a core principle in Nelson’s model of basic research (1959)?
What is a core principle in Nelson’s model of basic research (1959)?
According to Nelson, why will basic research be primarily conducted by large, diversified firms, and not small firms?
According to Nelson, why will basic research be primarily conducted by large, diversified firms, and not small firms?
Suppose the chain-linked model is right. What policies follow?
Suppose the chain-linked model is right. What policies follow?
What does Nelson's (1959) framework imply about R&D spending during national emergencies?
What does Nelson's (1959) framework imply about R&D spending during national emergencies?
According to the linear model of scientific progress, what is the role of Universities?
According to the linear model of scientific progress, what is the role of Universities?
Based on the models presented, which of the following policies may be best to fix issues of science under allocation?
Based on the models presented, which of the following policies may be best to fix issues of science under allocation?
Why may it sometimes be hard to model economic change correctly?
Why may it sometimes be hard to model economic change correctly?
What factors influence different spending on R&D between different countries?
What factors influence different spending on R&D between different countries?
According to Nelson, what would be the socially optimal amount of investment in basic research?
According to Nelson, what would be the socially optimal amount of investment in basic research?
Why might some countries scarify static efficiency for the dynamic efficiency?
Why might some countries scarify static efficiency for the dynamic efficiency?
Based on the content of this document, why do we see the state 'doing' the basic research.
Based on the content of this document, why do we see the state 'doing' the basic research.
Within the framework of Arrow's 1962 model, assuming a non-drastic innovation, under what precise condition would both a monopolist and a perfectly competitive firm exhibit identical incentives to innovate, thereby neutralizing differences in their market structures?
Within the framework of Arrow's 1962 model, assuming a non-drastic innovation, under what precise condition would both a monopolist and a perfectly competitive firm exhibit identical incentives to innovate, thereby neutralizing differences in their market structures?
Considering Nelson's (1959) arguments on basic research, what specific mechanism most effectively mitigates the underinvestment problem arising from uncertainty and low appropriability, especially in sectors characterized by long-term research horizons?
Considering Nelson's (1959) arguments on basic research, what specific mechanism most effectively mitigates the underinvestment problem arising from uncertainty and low appropriability, especially in sectors characterized by long-term research horizons?
Under conditions where both Arrow's appropriability concerns and Nelson's uncertainty considerations are simultaneously relevant, what policy intervention would theoretically achieve the Pareto-optimal level of basic research funding, accounting for both knowledge spillovers and inherent project risk?
Under conditions where both Arrow's appropriability concerns and Nelson's uncertainty considerations are simultaneously relevant, what policy intervention would theoretically achieve the Pareto-optimal level of basic research funding, accounting for both knowledge spillovers and inherent project risk?
Within the chain-linked model, if market feedback ('F') reveals a critical performance bottleneck in a mature technology, what iterative pathway is MOST likely to yield a disruptive innovation capable of circumventing the limitation?
Within the chain-linked model, if market feedback ('F') reveals a critical performance bottleneck in a mature technology, what iterative pathway is MOST likely to yield a disruptive innovation capable of circumventing the limitation?
Suppose a firm exclusively adopts the 'Linear Model' in its R&D strategy. What organizational capability would it MOST likely under-develop, leading to potential strategic vulnerabilities?
Suppose a firm exclusively adopts the 'Linear Model' in its R&D strategy. What organizational capability would it MOST likely under-develop, leading to potential strategic vulnerabilities?
What intrinsic limitation of the Linear Model MOST severely restricts its applicability in explaining the emergence and diffusion of 'combinatorial innovations,' such as smartphones or advanced materials?
What intrinsic limitation of the Linear Model MOST severely restricts its applicability in explaining the emergence and diffusion of 'combinatorial innovations,' such as smartphones or advanced materials?
Assume a policy maker seeks to promote radical innovation using insights from the chain-linked model. Which financial incentive would be most effective at accelerating cross-disciplinary interactions?
Assume a policy maker seeks to promote radical innovation using insights from the chain-linked model. Which financial incentive would be most effective at accelerating cross-disciplinary interactions?
How does the chain-linked model refine the classic distinction between 'invention' and 'design,' particularly in contexts demanding high levels of system integration (e.g., aerospace or biomedical engineering)?
How does the chain-linked model refine the classic distinction between 'invention' and 'design,' particularly in contexts demanding high levels of system integration (e.g., aerospace or biomedical engineering)?
According to Nelson (1959), what specific condition in basic research makes it difficult to determine the optimal level of public support?
According to Nelson (1959), what specific condition in basic research makes it difficult to determine the optimal level of public support?
Within the context of Arrow’s 1962 framework, fully appropriable innovations are modeled using patents of infinite length. Which scenario BEST illustrates the economic trade-off related to the social welfare implications of this assumption?
Within the context of Arrow’s 1962 framework, fully appropriable innovations are modeled using patents of infinite length. Which scenario BEST illustrates the economic trade-off related to the social welfare implications of this assumption?
Consider a scenario where a government agency mandates open access to all publicly funded research findings. How would this policy alteration MOST directly challenge Arrow's (1962) initial assumptions concerning appropriability and innovation incentives?
Consider a scenario where a government agency mandates open access to all publicly funded research findings. How would this policy alteration MOST directly challenge Arrow's (1962) initial assumptions concerning appropriability and innovation incentives?
If a public planner solely emphasizes static efficiency, according to Nelson (1959), how does the effect on overall R&D spending compare to the effect from a dynamic efficiency perspective?
If a public planner solely emphasizes static efficiency, according to Nelson (1959), how does the effect on overall R&D spending compare to the effect from a dynamic efficiency perspective?
Assume a developing country prioritizes dynamic efficiency by granting monopolies to domestic firms. How might this strategic decision affect long-run economic development given the risk factors associated with innovation?
Assume a developing country prioritizes dynamic efficiency by granting monopolies to domestic firms. How might this strategic decision affect long-run economic development given the risk factors associated with innovation?
In the chain-linked model, under what circumstances would a firm MOST likely transition from relying primarily on 'K' (existing scientific knowledge) to engaging in 'R' (original scientific research)?
In the chain-linked model, under what circumstances would a firm MOST likely transition from relying primarily on 'K' (existing scientific knowledge) to engaging in 'R' (original scientific research)?
Within the chain-linked model, what is the most significant effect on the innovation process of 'Arrow D' (Radical Innovation -> Science)?
Within the chain-linked model, what is the most significant effect on the innovation process of 'Arrow D' (Radical Innovation -> Science)?
Flashcards
Linear Model of Innovation
Linear Model of Innovation
A model where innovation progresses linearly from research to development, production, and marketing.
Chain-Linked Model of Innovation
Chain-Linked Model of Innovation
A model acknowledging feedback loops and interactions between different stages of innovation, including science, design, manufacturing and marketing.
Drawback of Linear Model
Drawback of Linear Model
The belief that technological innovation has a lack of key feedback loops.
Exogenous View of Science
Exogenous View of Science
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The State's Role
The State's Role
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Market Failure
Market Failure
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Bayh-Dole Act
Bayh-Dole Act
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Uncertainty
Uncertainty
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Marginal Benefits of Research
Marginal Benefits of Research
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Stored Scientific Knowledge
Stored Scientific Knowledge
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Scientific research (university)
Scientific research (university)
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Invention
Invention
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Analytical Design
Analytical Design
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Assumption 1
Assumption 1
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Assumption 2
Assumption 2
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Study Notes
Models of Innovation
- Economists considered technological innovation a "black box," focusing only on inputs and outputs
- Innovation policies rely on understanding how innovation works
- The linear model and the chain-linked model are two different takes on innovation
The Linear Model
- This model flows in a linear direction with steps of research, development, production, and marketing
- Examples include medicine, JET, Nuclear power and mRNA
Linear Model Origins
- The linear model had origins in the success of WWII science programs, like the Manhattan Project
- It also takes into account top-down (Fordist) managerial approaches
Linear Model: Key Objectives
- A key objective of the linear model was supporting "big science" policies in the US and UK in the 1940s-60s
Influence Today
- Justification for "public support to science" exists
- There is a classification scheme for R&D statistics
Drawbacks of the Linear Model
- Innovation design isn't optimized without feedback and trials; shortcomings and failures are part of learning
- An example of using feedback occurred with the Boeing 707 and DC-8 where the success of the 707 involved Boeing correcting the aircraft size and flight range
- Other sources of innovation, like learning by doing, are neglected
- Technology is merely applied science
- The problems of flow opened a new scientific discipline: asymptotic perturbation theory
- Important inventions occur when science is inadequate
- When the asymptotic perturbation theory wasn't advanced, engineers could still design airplane wings
- Often, the knowledge to innovate already exists, however new research is needed when existing knowledge falls short
Linear Model Role of State
- According to the linear model, these are the 2 market failures in the production of knowledge
- Suboptimal private provision of innovation
- Arrow addresses this in 1962
- Suboptimal private provision of basic science
- Nelson addresses this in 1959
- An uncertainty exists in the application of scientific knowledge
- Countries are active R&D actors
Economic Welfare and Allocation of Resources for Invention: Assumptions
- Arrow states existing technology allows for constant average costs: c0
- Non-drastic (incremental) process innovation is available:c1 < c0 AND pmonopoly(c1 ) > c0
- Innovation can be introduced by spending a lump-sum R in R&D
- Once introduced, the innovation is fully appropriable (no imitation) -> patent of infinite length
Arrow (1962): Question
- Who has the greatest incentive to innovate?
- Monopolist
- Perfectly competitive firm
- Public planner -> state
Arrow (1962): Monopolist Incentive
- INCENTIVE = P(c1) – P (c0) (sake of simplicity: discount rate over time = 1)
- P(c0) = total revenues – costs
Arrow (1962): Perfect Competition
- The price of the innovative firm is c0-~
- Innovation incentive = P(c1) – 0 = A+B
Arrow (1962): Public Planner
- Innovation incentive = Welfare (c1) – Welfare (c0) = A+B+C area
Arrow (1962): Conclusions
- Incentive to Innovate:
- Monopolist = A
- Perfectly competitive firm = A + B
- Public planner = A + B + C
- Market Failure: If innovation investment is left to the private sector, it leads to underinvestment
- Remedies
- Direct public investment in R&D for public provision of inventions
- Subsidies to private investment in R&D for private provision of inventions (R&D tax credit in France)
- Competitive markets give firms more incentives to invest in R&D
Knowledge and Uncertainty
- Three strong assumptions of Arrow in 1962
- The innovative effort produces only one innovation
- Complete appropriability of the innovation
- There is no uncertainty
- R&D investments in the real world are the closer to basic research
Simple Economics of Basic Research: Characteristics
- Research results and especially basic research are uncertain
- Only big firms bear this
- Big firms have the « random screening » process
- There are several innovations from 1 discovery, such as gene editing to create modified plants, disease treatments, drug production, and modified animals
Simple Economics of Basic Research: Appropriability/Innovation
- There is very low appropriability of basic research
- Firms cannot patent scientific principles/formulas
- Firms only patent commercial applications
- Innovations are far in time
- Maxwell's equations led to medicine's use of x-rays
- There is a minimum level of investment in R&D needed to get the right innovation
- Minimum size of R&D labs is important
- There is also a need for large budget
Knowledge and Uncertainty Assumptions
- Uncertainty dominates R&D, particularly with basic/scientific research
- Marginal Benefits depend upon the number of innovations
- Marginal costs of research become constant for sake of simplicity
Nelson (1959): Incentive to Invest in Basic R
- Public planner > Monopolist (Large firm) > Competitive (small firm)
- Notice the difference from Arrow (1962)
- Market failure occurs when investment in basic research is left to the sector, because it leads to underinvestment
What Are The Basic R Remedies
- The state invests in the basic research
- There is cooperative industry-public basic research
- Some countries scarify static efficiency for the dynamic efficiency to let big firms have market power to do basic research
The State Does Basic Research
- It relies on Big National Institutions specializing in basic disciplines:
- Max-Planck-Institut (D)
- National Science Foundation (NSF, USA)
- Centre National de la Recherche Scientifique (CNRS, F)
- Centro Nazionale delle Ricerche (CNR, I)
- Origin: 1st half of XX century
- Research labs alternative/complementary to universities
- There are Big National Institutions dedicated to technologies
- ENEA (ex atomic energy, now environment-energy…)
- Istituto Nazionale dei Tumori
- Agenzia Spaziale Italiana
- Origin: post WWII "Big Science" projects -> linear model of innovation
- Universities are strong in Anglo-Saxon/Scandinavian countries, but growing everywhere
- Till late XIX century, they were just teaching institutions
Coop Basic Research/Industry-Public: Bayh-Dole Act
- In 1980, the Act authorized universities/faculty to patent federally funded research outputs
- The Bayh-Dole Act led universities to make university research conduct more appropriable and interesting
- Research units were designed within universities to attract/accept commercial funds
- This was done by promising transfer of intellectual property rights on discoveries
- Universities signed research contracts, like the deal between Hoechst and Harvard in 1984
Efficiency Scarification
- Some countries scarify static efficiency for dynamic efficiency by leaving big firms market power so they can do basic research
Rise of Science
- Since the 1950's, there have been trends of an explosion of public funding of R&D in the 1950's and 1960's in the United States and Europe
- There was growth of business R&D and emergence of East Asia
Official Statistics: Key Info
- There is VERY LARGE cross-country differences in R&D intensity/composition due to:
- Industrial structure
- Science policies
- Military power -> defense industry
- Educational level of population
The Chain-Linked Model
- A descriptive model but scarcely tractable by formal analysis
- Origin
- Critique in the 1970's, for US and UK science policies
- Critique for large firms' approach to R&D
Chain-Linked Model Characteristics
- Endogeneity of science
- Complexity of science and technology links
- Highlights "hidden" innovation sources and how science relates
- Criticizes distinctions between Basic/Applied research
- The path is called the Central-Chain Innovation. It's labelled with C
- Feedback links are labeled with f and F, connecting the perceived market needs to potential product/service improvements
Economic Side Importance
- Concorde is an an example of something that was a technological achievement but an economic failure; fuel per passenger costs 15 times that of a 747
- Apppeal depends on solar energy's cost relative to others
Innovation Origins
- Invention is achieving functions that aren't obvious based on skill from prior art
- i.e., gene editing or transistors
- Analytic design has innovations from re-configuration with technology of base components
Science/Innovation Link
- The science and innovation link isn't only at the beginning of the innovation process, it also extends alongside the development process
Knowledge and Research: Links
- Stored scientific knowledge is first used, then scientific research
- Research is more costly/time consuming
Arrows and Science
- Arrow D involves radical innovations like lasers, semiconductors, and genetic engineering
- Arrow I involves technology from product innovation to science
- Example of this is Microscope -> modern medicine
- Example of this is Telescope -> astronomy
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