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Redistributive Innovation Policy, Inequality and Efficiency

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  • Parantap Basu

    (Durham University Business School, Durham University, Durham, UK)

  • Yoseph Getachew

    (Department of Economics, University of Pretoria, Pretoria, South Africa)

Abstract

Using a heterogenous-agent growth model with in-house R&D and incomplete capital markets, we examine the efficiency and distributional effects of alternative public R&D policies that target high-tech and low-tech sectors. We find that such policies have important implication for efficiency, inequality and social mobility. A regressive public R&D investment financed by income tax could boost growth and welfare via a positive effect on individual savings and effort. However, it could also discourage them via its effect on the efficiency-inequality trade off. The relationship between public R&D spending and welfare is therefore hump shaped admitting an optimal degree of regressivity in public R&D spending. A case for optimal progressive public R&D investment, however, can be made with a properly designed R&D policy that combines consumption tax and investment subsidy policies.

Suggested Citation

  • Parantap Basu & Yoseph Getachew, 2017. "Redistributive Innovation Policy, Inequality and Efficiency," Working Papers 201768, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201768
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    Keywords

    Public R&D investment; inequality dynamics; social mobility; growth; welfare;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • H4 - Public Economics - - Publicly Provided Goods
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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