There are three classes of tradeable objects: labor, a consumption good, and
an intermediate good. There is a continuum of infinitely-lived individuals, with
identical intertemporally additive preferences defined over lifetime consumption,
and the constant rate of time preference r > 0. The marginal utility of
consumption is assumed constant; thus r is also the rate of interest.
There is no disutility from supplying labor. There are three categories of
labor: unskilled labor, which can be used only in producing the consumption
good; skilled labor, which can be used either in research or in the intermediate
sector; and specialized labor, which can be used only in research. Each individual
is endowed with a one-unit flow of labor. Let M, N, and R denote
respectively the mass of unskilled, skilled, and specialized individuals.
The consumption good is produced using the fixed quantity M of unskilled
labor, and the intermediate good, subject to constant returns. Since M is fixed,
the production function can be written as research.