Basic and Applied Research: A Welfare Analysis

This study constructs a variety expansion growth model that integrates basic research to analyse its effects on household welfare. In our model, the research sector consists of applied and basic research components. The former creates blueprints and expands the variety of goods available for consumption, whereas the latter adds to the public‐knowledge stock. The analysis yields several results. First, the steady‐state welfare‐maximizing level of basic research is below the steady‐state growth‐maximizing level. Second, a consideration of the welfare effects during the transition path suggests that marginal changes in the level of basic research can increase household welfare even at its steady‐state welfare‐maximizing level. Third, by using data from Japan, we calibrate the model and find that an increase in basic research spending raises household welfare.