Market failures in the R&D growth model with endogenous labor supply

This paper shows that even in the absence of externalities, there is a market failure associated with an endogenous choice between labor and leisure in a growth model with imperfect competition. The reason for this is that workers are paid less than the value of their marginal products, and therefore supply less labor than would be optimal from the viewpoint of the society as a whole. This in turn hampers growth. It is also demonstrated how this inefficiency can be corrected by an appropriate wage subsidy.