Topic: Innovation Networks and R&D Allocation
Speaker: Ernest Liu, Assistant Professor of Economics, Princeton University
Time: 10:00am-11:30am, November 16 (Beijing Time)
We study the cross-sector allocation of R&D resources in a multisector growth model with an innovation network, where one sector’s past innovations may benefit other sectors’ future innovations. Theoretically, we solve for the optimal path of R&D resource allocation. We show a planner valuing long-term growth should allocate more R&D toward upstream sectors in the innovation network, but the incentive is muted in open economies that rely on foreign knowledge spillovers. We derive sufficient statistics for evaluating the welfare cost of R&D misallocation. Empirically, we build the global innovation network based on patent citations and establish its empirical importance for knowledge spillovers. We evaluate R&D allocative efficiency across countries using model-based sufficient statistics. Japan has the highest allocative efficiency among the advanced economies. For the U.S., reducing R&D misallocation down to Japan’s level could generate more than 28% welfare gains.
About the speaker:
Ernest Liu’s research studies the implications of weak financial institutions for economic growth, allocation of resources, and economic development. One strand of his work uses network theory to study linkages across economic sectors, technological classes, and countries, and the implication of such linkages for policy. Another strand of work shows how low, long-term interest rates affect market concentration and productivity growth; how banks with market power respond to interest rate ceilings in small business lending; and, how financial market imperfections not only distort economic allocations via underinvestment but may greatly amplify effects due to interactions across economic sectors or because the relationships between borrowers and lenders create under-development traps. He received his Ph.D. in Economics from MIT and joined Princeton’s faculty in 2019.