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Effects of subsidies on growth and welfare in a quality‐ladder model with elastic labor

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  • Ruiyang Hu
  • Yibai Yang
  • Zhijie Zheng

Abstract

This paper develops a quality‐ladder growth model with elastic labor supply and distortionary taxes to analyze the effects of different subsidy instruments: subsidies to the production of final goods, subsidies to the purchase of intermediate goods, and subsidies to research and development (R&D). Moreover, the model is calibrated to the US data to compare the growth and welfare implications of these subsidies. The main results are as follows. First, we analytically show that an optimal coordination of all instruments attains the first‐best outcome. Second, in the calibrated economy, we numerically find that for the use of a single instrument, R&D subsidy is less growth‐enhancing and welfare‐improving than the other subsidies, whereas for the use of a mix of two instruments, subsidizing the production of final goods and the purchase of intermediate goods is most effective in promoting growth but least effective in raising welfare.

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  • Ruiyang Hu & Yibai Yang & Zhijie Zheng, 2023. "Effects of subsidies on growth and welfare in a quality‐ladder model with elastic labor," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 25(5), pages 1096-1137, October.
    • Handle: RePEc:bla:jpbect:v:25:y:2023:i:5:p:1096-1137
    DOI: 10.1111/jpet.12645
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    More about this item

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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