In an influential paper, Romer (1990) built a path-breaking endogenous growth model based on three major premises: technological change is at the hearth of economic growth; it is the result of an intentional economic activity (R&D) carried out by forward-looking, rational agents in search of higher rewards; technological knowledge is a non-rival input that can be accumulated without bounds on a per capita basis. Given its intrinsically non-rival nature, knowledge introduces non-convexities into the standard neoclassical production function with constant returns to scale to the rival inputs and, therefore, a decentralized equilibrium with price-taking competition can no longer be sustained. On these grounds the claim follows that: “…the only way to accept all three premises described in the Introduction is to return to the suggestion of Schumpeter (1942) and explicitly introduce market power” (Romer, 1990, p. S78).
Indeed, Schumpeter (1942) was among the first to recognize that more market power, by increasing the rents that can be appropriated by the successful innovator, spurs R&D activity, so accelerating the pace of technological progress and economic growth.
Even though the Schumpeterian hypothesis (negative relationship between competition and innovation) is now shared by a variety of settings (such as Dasgupta and Stiglitz 1980; Spence 1984; Qiu 1997 and, more recently, Vives 2008, for example), empirical analysis (see, among others, Porter 1990; Geroski 1994; Baily and Gersbach 1995; Blundell et al. 1995; Nickell 1996 and Symeonidis 2003) support, instead, the belief that competitive pressures encourage unambiguously innovative output and, thus, should play a positive role on economic growth.
In the literature cited above, the assumption made is that population is constant. We now know that innovative activity, and thus economic growth, is influenced not only by the degree of concentration of the product market, but also by demographic forces. Kuznets (1960), Simon (1981), Lee (1988), Boserup (1989) and Kremer (1993) are among the main advocates of the so called “population-push hypothesis”. Recently, Jones and Romer (2009, p.14) have summarized this argument by claiming: “More people lead to more ideas”.
On the basis of these scientific premises, we have three major purposes. The first is to build a unifying theory to be used for analyzing quantitatively the interplay between competition and population in affecting an economy’s innovation and growth rates. The second is to analyze the conditions under which population and market structure can act as complementarily in economic growth. The traditional Population-push and Schumpeterian hypotheses, taken in isolation, do not allow to do this. Finally, our third aim consists in investigating the role that competition in product market might have in shaping the ambiguous long-run relationship between population and economic growth rates.