Evolution of Preferences, Demand, and Growth Through Product Innovation

Abraham Garcia-Torres, MERIT, Maastricht University

Growth theory has mainly focused on process innovation, either through an increase in quality of the product or a reduction on the cost. The main contributions in growth theory that includes product innovation has been done in the Dixit and Stiglitz framework. This framework works with oversimplifying restrictions on the demand side: Preferences of consumers are assumed to be constant and equals for all goods.\\

This paper present what are the implication for growth theory once you eliminate these assumptions. A dynamic setting for the evolution of preferences is introduced. Innovation is not the normal reduction in cost but an increase in the capacity to satisfy the consumer. The competition is not in productivity but in capacity to get the attention and budget of the consumers. The goal of the paper is to present a model in which evolution of preferences made goods different and study its implications for the general growth equilibria.

Date: 31 May-00 0000