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Endogenous Growth Through Investment-Specific Technological Change

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  • Greg Huffman

    (Vanderbilt University)

Abstract

This paper examines a model in which growth takes place through investment-specific technological change, which in turn is determined endogenously through research spending. In particular, the role of the degree of substitutability between research spending and new capital construction is explored. It is shown that the effect of a change in the capital tax rate on the growth rate can depend on the degree of substitability between research spending and new capital construction. Research subsidies tend to have a larger impact on the growth rate than would an investment tax credit of the same magnitude. Increases in the capital tax rate can increase the growth rate of the economy, even in the absence of externalities. In contrast to the existing literature, the welfare cost of capital taxation in this model can be negligible. There may be multiple tax rates on capital that achieve the same growth rate. It is demonstrated that in the presence of certain types of positive externalities, the optimal growth rate can be attained through the use of capital taxes -- rather than subsidies. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2007.02.005
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 10 (2007)
Issue (Month): 4 (October)
Pages: 615-645

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Handle: RePEc:red:issued:05-30

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Related research

Keywords: Investment specific technological change; Capital taxation; Growth; Research; Externalities;

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References

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  1. Nancy L. Stokey & Sergio Rebelo, 1993. "Growth Effects of Flat-Rate Taxes," NBER Working Papers 4426, National Bureau of Economic Research, Inc.
  2. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  3. Greenwood, J. & Hercowitz, Z. & Krusell, P., 1996. "Long-Run Implications of Investment-Specific Technological Change," RCER Working Papers 420, University of Rochester - Center for Economic Research (RCER).
  4. Michael Gort & Jeremy Greenwood & Peter Rupert, 1998. "Measuring the rate of technological progress in structures," Working Paper 9806, Federal Reserve Bank of Cleveland.
  5. Greenwood, J. & Hercowitz, Z. & Krusell, P., 1998. "The Role of Investment-Specific Technological Change in the Business Cycle," RCER Working Papers 449, University of Rochester - Center for Economic Research (RCER).
  6. S. Rao Aiyagari, 1994. "Optimal capital income taxation with incomplete markets, borrowing constraints, and constant discounting," Working Papers 508, Federal Reserve Bank of Minneapolis.
  7. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June.
  8. Gordon, Robert J., 1990. "The Measurement of Durable Goods Prices," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226304557.
  9. Robert J. Gordon, 1990. "The Measurement of Durable Goods Prices," NBER Books, National Bureau of Economic Research, Inc, number gord90-1, October.
  10. Dale W. Jorgenson, 2001. "Information Technology and the U.S. Economy," American Economic Review, American Economic Association, vol. 91(1), pages 1-32, March.
  11. Dale W. Jorgenson, 2001. "Information Technology and the U. S. Economy," Harvard Institute of Economic Research Working Papers 1911, Harvard - Institute of Economic Research.
  12. Peter Howitt, 1999. "Steady Endogenous Growth with Population and R & D Inputs Growing," Journal of Political Economy, University of Chicago Press, vol. 107(4), pages 715-730, August.
  13. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
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Cited by:
  1. Lin, Xiaoji, 2012. "Endogenous Technological Progress and the Cross Section of Stock Returns," Working Paper Series 2012-22, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  2. Huffman, Gregory W., 2008. "An analysis of fiscal policy with endogenous investment-specific technological change," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3441-3458, November.
  3. Bishnu, Monisankar & Ghate, Chetan & Gopalakrishnan, Pawan, 2011. "Distortionary Taxes and Public Investment in a Model of Endogenous Investment Specific Technological Change," MPRA Paper 34111, University Library of Munich, Germany.
  4. Ricardo Azevedo Araujo & Gilberto Tadeu Lima, 2008. "Investment-Specific Technological Change, Investment Sectoral Allocation and Human Capital Accumulation in a Model of Export-Led Growth," Anais do XXXVI Encontro Nacional de Economia [Proceedings of the 36th Brazilian Economics Meeting] 200807211332520, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  5. Araujo, Ricardo Azevedo & Lima, Gilberto Tadeu, 2011. "Embodied technological change, capital sectoral allocation and export-led growth," MPRA Paper 29810, University Library of Munich, Germany.

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