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

Abstract

This 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.