R&D Financing and Production: A New Ricardian Specific Fator Model

Abstract

This paper contributes to the literature on finance,production, and Research and Development (R&D) byinvestigating the unique possibilities of polarized deci-sions of entrepreneurs to yield “extreme” points ratherthan an “interior solution.” Financiers provide credits foremploying sector‐specific skilled and unskilled workersas well as for R&D. With the objective of maximizingreturns, financiers' interest lies in financing R&D only inthe skilled sector while the unskilled sector—withoutinnovation—collapses. Such corner solution occurs dueto much higher skilled‐augmenting technical changeguaranteeing maximum prospective return than that inthe unskilled. This offers a novel interpretation of adeclining share of production workers.