Knowledge-intensive business services and economic growth with endogenous market structure

The Knowledge-Intensive Business Services (KIBS) sector has been growing in the US in the recent decades. KIBS are used to overcome the information friction between intermediate inputs and the input users that is generated by technology improvement. We use a Schumpeterian growth model with endogenous market structure to analyze the impacts of KIBS on economic growth and welfare. The model provides the full transition dynamics as well as the balanced growth path, allowing us to engage in welfare analysis. KIBS have a positive effect on the short-run growth of output and consumption, but have no impact on long-run growth because of the endogeneity of market structure. This paper shows analytically and numerically that although KIBS have only a short-run effect, a subsidy to KIBS is welfare improving.