Optimal policy and non-scale growth with R&D externalities
AbstractAn established result of the endogenous growth literature is that laissez-faire equilibria in expanding-varieties models are suboptimal due to the rent-effect: monopolistic pricing drives the equilibrium quantity of each intermediate input below the efficient level, implying that it is optimal to subsidize �final producers. This paper shows that, if scale effects are eliminated by introducing R&D spillovers, 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 level and the optimal policy consists of taxing, instead of subsidizing fi�nal producers because fi�scal authorities must redirect the extra-output generated by under-investment towards R&D activity.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 32473.
Date of creation: 29 Jul 2011
Date of revision:
Endogenous Growth; Scale Effects; R&D Externalities; Optimal Policy;
Other versions of this item:
- Simone Valente, 2009. "Optimal Policy and Non-Scale Growth with R&D Externalities," CER-ETH Economics working paper series 09/116, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
- 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-2011-08-09 (All new papers)
- NEP-FDG-2011-08-09 (Financial Development & Growth)
- NEP-INO-2011-08-09 (Innovation)
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