On some frictions of the Romerian knowledge production function

Abstract

Are ideas getting really harder to find? This is the question Bloom and his co-authors asked in 2020 in the columns of the American Economic Review. According to their empirical research, the answer is yes: Researcher's output is declining at a demonstrable rate worldwide. This study attempts to provide a possible explanation for the reasons for this decline. We investigate why the dynamic growth of R\&D expenditures does not result in higher productivity? The question is particularly important because, according to the Solow model, the only way to increase the standard of living is to increase productivity. We seek the answer in the micro-level foundation of Romer's knowledge production function, which points out the frictions of this function. We will demonstrate that signals from the environment of the researcher or research institution can distort both intratemporal and intertemporal decisions. On the one hand, the distortion results in the focus of research project not being on increasing the productivity of the corporate sector, but on publication performance, and on the other hand, young researchers spend an irrationally small amount of time expanding their knowledge. The demonstration of the above phenomena necessitates the exploration of the deeper structure of productivity knowledge summarized in a single variable in Romer's knowledge production function. To do this, we will introduce an infinite directed graph.