R&D financing and production: A new Ricardian specific factor model

Abstract

AbstractThis paper contributes to the literature on finance, production, and Research and Development (R&D) by investigating the unique possibilities of polarized decisions of entrepreneurs to yield “extreme” points rather than an “interior solution.” Financiers provide credits for employing sector‐specific skilled and unskilled workers as well as for R&D. With the objective of maximizing returns, financiers' interest lies in financing R&D only in the skilled sector while the unskilled sector—without innovation—collapses. Such corner solution occurs due to much higher skilled‐augmenting technical change guaranteeing maximum prospective return than that in the unskilled. This offers a novel interpretation of a declining share of production workers.