|Author Name||FURUKAWA Yuichi (Faculty Fellow, RIETI) / Tat-kei LAI (IÉSEG School of Management) / SATO Kenji (Osaka Prefecture University)|
|Creation Date/NO.||October 2018 18-E-073|
|Research Project||Evidence-based Policy Study on the Law and Economics of Market Quality|
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People's desire for novelty is often perceived to encourage innovation. However, our cross-country evidence suggests that the relationship can be negative. To explain this empirical finding, we develop a new R&D-based growth model which incorporates people's novelty-seeking traits. In our model, people's novelty-seeking traits are captured by their extra preference towards new goods; besides, innovation is achieved through new and existing product development as two separate processes of innovation, both requiring costly and time-consuming investment activities. We find that if the level of inherent novelty seeking is higher than some threshold level, then the economy is caught in an underdevelopment trap with less innovation; otherwise, it provides innovation perpetually and achieves long-run growth. Our model shows that the effects of higher levels of inherent novelty seeking on innovation and economic growth can be negative. Our result suggests an essential role of the public's preference for novelty in designing a more favorable economic institution and policy that support innovation and growth.