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Defense R&D: Effects on Economic Growth and Social Welfare

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  • Chu, Angus C.
  • Lai, Ching-Chong

Abstract

In the US, defense R&D share of GDP has decreased significantly since 1960. To analyze the implications on economic growth and welfare, we develop an R&D-based growth model that features the commonly discussed crowding-out and spillover effects of defense R&D on civilian R&D. The model also captures the important effects of defense technology on (a) national security and (b) aggregate productivity via the spin-off effect resembling consumption public goods and productive public goods respectively. In this framework, economic growth is driven by market-based civilian R&D as in standard R&D growth models and government-financed public goods (i.e. defense R&D) as in Barro (1990). We find that defense R&D has an inverted-U-shape effect on growth, and the growth-maximizing level of defense R&D is increasing in the spillover effect and in the spin-off effect. Also, there is a welfare-maximizing level of defense R&D that is increasing in the security effect of national defense, and there exists a critical degree of this security effect below (above) which the welfare-maximizing level of defense R&D is below (above) the growth-maximizing level.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 16325.

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Date of creation: Jul 2009
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Handle: RePEc:pra:mprapa:16325

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Keywords: defense R&D; economic growth; public goods; social welfare;

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