Introduction to Modern Economic Growth This equation shows that V (q) is clearly increasing in the tax rate on R&D, τ Therefore, in response to a positive rate of taxation, r∗ (τ ) + z ∗ (τ ) must adjust downward, so that the value of current monopolists increases (consistent with the previous equation) It is straightforward to verify that the equilibrium growth rate in this case will be (1 + τ )−1 ληβL − ρ , g (τ ) = θ + (λ − 1)−1 ∗ which is decreasing in τ Nevertheless, as the previous expression shows, incumbent monopolists would be in favor of increasing τ in order to shield themselves from the competition of new entrants Essentially, in this model, slowing down the process of creative destruction is beneficial for incumbents, creating a rationale for growthretarding policies to emerge in equilibrium Therefore, an important advantage of models of competitive innovations is that they start providing us clues about why some societies may adopt policies that reduce the growth rate Since taxing R&D by new entrants benefits incumbent monopolists, when the incumbents are sufficiently powerful, such distortionary taxes can emerge in the political economy equilibrium, even though they are not in the interest of the society at large 14.2 A One-Sector Schumpeterian Growth Model The model of competitive innovations presented in the previous section was designed to maximize the parallels between this class of models and those based on expanding varieties In this section, we discuss a model more closely related to the original Aghion and Howitt (1992) setup, which is simpler in some ways and more complicated in others Relative to the model presented in the previous section, it has two major differences First, there is only one sector experiencing quality improvements rather than a continuum of machine types Second, the innovation possibilities frontier uses a scarce factor, labor, as in the model of knowledge spillovers in Section 13.2 of the previous chapter Since there are many parallels between this model and those we have studied so far, we will provide only a brief exposition of this model 623