Optimal Policy and Non-Scale Growth with R&D Externalities
AbstractAn established result of the endogenous growth literature is that competitive equilibria in expanding-varieties models are suboptimal due to the rent-effect: monopolistic pricing drives the equilibrium quantity of each intermediate below the efficient level, implying that it is optimal to subsidize final producers. This paper shows that, if scale effects are eliminated by including R&D spillovers in the model, normative prescriptions change. Since the laissez-faire economy under-invests into R&D activity, the share of resources devoted to intermediates' production increases, and this reallocation effect contrasts the rent-effect. In many scenarios, including the polar case of logarithmic preferences, the reallocation effect surely dominates: the equilibrium quantity of each intermediate exceeds the optimal one, and the optimal policy consists of taxing final producers because fiscal authorities must internalize the overshooting mechanism generated by under-investment in R&D.
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Bibliographic InfoPaper provided by CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich in its series CER-ETH Economics working paper series with number 09/116.
Length: 26 pages
Date of creation: Aug 2009
Date of revision:
Endogenous Growth; Scale Effects; R&D Externalities; Optimal Policy;
Other versions of this item:
- Valente, Simone, 2011. "Optimal policy and non-scale growth with R&D externalities," MPRA Paper 32473, University Library of Munich, Germany.
- O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
- O31 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-10-03 (All new papers)
- NEP-DGE-2009-10-03 (Dynamic General Equilibrium)
- NEP-INO-2009-10-03 (Innovation)
- NEP-MIC-2009-10-03 (Microeconomics)
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