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Quantitative growth effects of subsidies in a search theoretic R&D model

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Author Info

  • Benjamin Bental

    (Department of Economics, University of Haifa, Mount Carmel, Haifa - 31905, Israel)

  • Dan Peled

    (Department of Economics, University of Haifa, Mount Carmel, Haifa - 31905, Israel)

Abstract

Should government subsidize R&D and does it matter how these subsidies are allocated? We examine these questions in a dynamic model where R&D is described as sequential sampling from a distribution of new ideas. Successful discoveries affect future available resources and incentives for further R&D. Consequently, there may be under-investment in R&D. We study the effect of government interventions aimed at fostering growth through R&D. Calibrating the model with aggregate data from the Israeli business sector allows us to quantitatively compare two forms of support resembling those actually used to encourage R&D in the Israeli business sector: (i) an unrestricted subsidy that may be used at the recipients' discretion to finance R&D or other investments, (ii) a subsidy earmarked by the government for R&D activities only. While there is no theoretical way to determine which of the two subsidies will have a greater impact on search for new ideas and growth, we find that in the calibrated economy both subsidies have a significant but similar impact on the economy's output and TFP growth rates. Accordingly, in the case of the Israeli business sector, the incentives to conduct R&D were sufficiently strong, and no R&D-specific encouragement was needed. However, a sensitivity analysis reveals that for economies characterized by other parameter values this result may not be true.

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Bibliographic Info

Article provided by Springer in its journal Journal of Evolutionary Economics.

Volume (Year): 12 (2002)
Issue (Month): 4 ()
Pages: 397-423

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Handle: RePEc:spr:joevec:v:12:y:2002:i:4:p:397-423

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Web page: http://link.springer.de/link/service/journals/00191/index.htm

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Related research

Keywords: Subsidies - R&D - Endogenous growth;

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Cited by:
  1. Giovanni Cerulli, 2012. "Are R&D Subsidies Provided Optimally? Evidence from a Simulated Agency-Firm Stochastic Dynamic Game," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 15(1), pages 7.
  2. Minniti, A. & Parello, C. & Segerstrom, P. S., 2008. "A Schumpeterian Growth Model with Heterogenous Firms," MPRA Paper 13674, University Library of Munich, Germany.
  3. Chhabra, Meenal & Das, Sanmay & Sarne, David, 2014. "Expert-mediated sequential search," European Journal of Operational Research, Elsevier, vol. 234(3), pages 861-873.

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