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Subsidies In An Economy With Endogenous Cycles Over Investment And Innovation Regimes

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  • Li, Bei
  • Zhang, Jie

Abstract

We explore the roles of subsidies in the Matsuyama model [K. Matsuyama, Econometrica 67 (1999), 335–347] of growth through cycles with a Solow investment phase and a Romer innovation phase when innovation and intermediate goods production rely on existing capital. We show that subsidies to R&D investment or to the purchase of new intermediate goods can arbitrarily reduce the threshold level of capital per type of intermediate good beyond which the economy moves to the innovation phase. Sufficient subsidization can eventually eliminate cycles. For plausible parameterizations, optimal subsidies can achieve significant welfare gains equivalent to as much as 10% rises in consumption at all times.

Suggested Citation

  • Li, Bei & Zhang, Jie, 2014. "Subsidies In An Economy With Endogenous Cycles Over Investment And Innovation Regimes," Macroeconomic Dynamics, Cambridge University Press, vol. 18(6), pages 1351-1382, September.
    • Handle: RePEc:cup:macdyn:v:18:y:2014:i:06:p:1351-1382_00
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    Cited by:

    1. 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.
    2. Lu, You-Xun & Chen, Shi-kuan & Lai, Ching-chong, 2022. "Subsidies, Entry, and Economic Growth in a Schumpeterian Model with Incumbents and Entrants," MPRA Paper 112179, University Library of Munich, Germany.
    3. Sunaga, Miho, 2017. "Endogenous growth cycles with financial intermediaries and entrepreneurial innovation," Journal of Macroeconomics, Elsevier, vol. 53(C), pages 191-206.
    4. Wan, Jing & Zhang, Jie, 2021. "Optimal growth through innovation, investment, and labor," European Economic Review, Elsevier, vol. 132(C).
    5. Jing Wan & Jie Zhang, 2023. "R&D subsidies, income taxes, and growth through cycles," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 76(3), pages 827-866, October.

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