C. Eriksson, MARKET FAILURES IN THE RESEARCH-AND-DEVELOPMENT GROWTH-MODEL WITH ENDOGENOUS LABOR SUPPLY, Journal of public economics, 61(3), 1996, pp. 445-454
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 pr
oducts, 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 appr
opriate wage subsidy.