Innovations and their adoption are the keys to growth and development. Innovations are less socially useful, but more profitable for the innovator, when they are adopted slowly and the innovator remains a monopolist. For this reason, rent-seeking, both public and private, plays an important role in determining the social usefulness of innovations. This paper examines the political economy of intellectual property, analyzing the trade-off between private and public rent-seeking. While it is true in principle that public rent-seeking may be a substitute for private rent-seeking, it is not true that this results always either in less private rent-seeking or in a welfare improvement. When the public sector itself is selfish and behaves rationally, we may experience the worst of public and private rent-seeking together.

Arrow (1962) argued that since a monopoly restricts output relative to a competitive industry, it would be less willing to pay a fixed cost to adopt a new technology. Arrow’s idea has been challenged and critiques have shown that under different assumptions, increases in competition lead to less innovation. We develop a new theory of why a monopolistic industry innovates less than a competitive industry. The key is that firms often face major problems in integrating new technologies. In some cases, upon adoption of technology, firms must temporarily reduce output. We call such problems switchover disruptions. If firms face switchover disruptions, then a cost of adoption is the forgone rents on the sales of lost or delayed production, and these opportunity costs are larger the higher the price on those lost units. In particular, with greater monopoly power, the greater the forgone rents. This idea has significant consequences since if we add switchover disruptions to standard models, then the critiques of Arrow lose their force: competition again leads to greater adoption. In addition, we show that our model helps explain the accumulating evidence that competition leads to greater adoption (whereas the standard models cannot).

Total factor productivity (TFP) differs greatly across countries. In this paper, I provide a novel rationalization for these differences. I consider two environments, one in which enforcement is full and the other in which enforcement is limited. In both settings, manufactured goods can be produced using a high-TFP technology or a low-TFP technology; there is a fixed cost associated with adoption of the former. I suppose that the fixed cost is sufficiently small that adoption takes place in a symmetric Pareto optimum in the limited-enforcement setting. Under this condition, I prove two results. First, adoption takes place in all Pareto optima in the full-enforcement setting. Second, adoption may not take place in a Pareto optimum in the limited-enforcement setting, if the division of social surplus is sufficiently unequal. I conclude that limited enforcement and high inequality interact to create particularly strong barriers to riches (in the language of Parente and Prescott (1999, 2000).

I develop an asset-pricing model in which financial assets are valued for their liquidity—the extent to which they are useful in facilitating exchange—as well as for being claims to streams of consumption goods. The implications for average asset returns, the equity-premium puzzle and the risk-free rate puzzle, are explored in a version of the model that nests the work of Mehra and Prescott (1985).