Habit Formation, Demand and Growth through product innovation
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 equal for all goods. This paper
introduces vertical and horizontal differentiation in final goods. Goods
are different in their habit formation parameters. Innovation is not the
normal reduction in costs but an increase in the capacity to satisfy
consumers’ needs. Growth in this model is defined as the growth of the
final value added.
JEL: O4, E21, D11, O31, M37. Keywords: growth, product innovation, technical change, consumption.
UNU-MERIT Working Papers ISSN 1871-9872