R&D Poverty Traps

In this paper we show that the R&D effort of a country and its economic growth are highly correlated. In order to analyze this relationship, we study the nature of the researching activity. In particular, we focus on the following characteristics of research: the inherent uncertainty of researching, the existence of a wage premium associated to innovative activities, and moral hazard. Assuming that a higher R&D effort translates into a higher R&D success probability, we show that when the R&D success probability is low, the economy is not willing to bear the risk associated to R&D activities. As a consequence, few researchers are hired and the economy stays in an R&D poverty trap, a situation where the economy is stacked in a low growth environment due to the uncertainty associated with the researching activity. In this situation, the economy grows at a constant rate, independent of the R&D success probability (although it could grow at a higher rate through a higher effort). On the other hand, if the economy increases its R&D effort such that the R&D success probability increases sufficiently, then the risk associated with R&D activities drops and the economy hires more researchers. Consequently, growth does depend on the R&D success probability and technological advancement becomes a driving force of the economy. We show that imperfect information widens this R&D poverty trap. We also show that subsidizing R&D through researchers' hiring increases growth, but it does not increase the likelihood of leaving the R&D poverty trap. Moreover, the subsidy widens the R&D poverty trap.