Optimal research and development expenditure: a general equilibrium approach
AbstractHow much should be spent in research and development (R&D)? How should R&D vary over the business cycle? In this paper we answer both questions in the context of a calibrated dynamic general equilibrium model with Schumpeterian endogenous growth. Firstly, we demonstrate that, although the existence of distortions in a decentralized economy produces underinvestment in R&D, a simple proportional subsidy to R&D spending alone cannot restore the first best allocation. The optimal proportional R&D subsidy attains a second best allocation in which R&D spending exceeds its first best level. Secondly, we show how the observed procyclicality of R&D is socially inefficient. However, the welfare loss due to this dynamic inefficiency is much smaller than the loss due to underinvestment in R&D.
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Bibliographic InfoPaper provided by Banco de EspaÃ±a in its series Banco de EspaÃ±a Working Papers with number 1009.
Length: 23 pages
Date of creation: Mar 2010
Date of revision:
Schumpeterian growth; technology adoption; optimal subsidy;
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- O38 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Government Policy
- O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-04-04 (All new papers)
- NEP-DGE-2010-04-04 (Dynamic General Equilibrium)
- NEP-INO-2010-04-04 (Innovation)
- NEP-MAC-2010-04-04 (Macroeconomics)
- NEP-MIC-2010-04-04 (Microeconomics)
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