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Welfare and growth impacts of innovation policies in a small, open economy. An applied general equilibrium analysis

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Brita Bye, Taran Fæhn and Tom-Reiel Heggedal (Statistics Norway)
Abstract

We explore how innovation incentives in a small, open economy should be designed in order to achieve the highest welfare and growth, by means of a computable general equilibrium model with R&D-driven endogenous technological change embodied in varieties of capital. We study policy alternatives targeted towards R&D, capital varieties formation, and domestic investments in capital varieties. Subsidising domestic investments, thereby excluding stimuli to world market deliveries, generates less R&D, capital formation, economic growth, and welfare, than do the other alternatives, reflecting that the domestic market for capital varieties is limited. Directing support to R&D rather than to capital formation generates stronger economic growth, a higher number of patents and capital varieties, and a higher share of R&D in total production. However, it costs in terms of lower production within each firm, where presence of sunk patent costs and mark-ups result in efficiency losses. The welfare result is, thus, slightly lower.

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Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 510.

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Date of creation: Jul 2007
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Handle: RePEc:ssb:dispap:510

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Keywords: Applied general equilibrium Endogenous growth Research and Development

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Find related papers by JEL classification:
C68 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computable General Equilibrium Models
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
O38 - Economic Development, Technological Change, and Growth - - Technological Change - - - Government Policy
O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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  1. Hertel, Thomas W., 1994. "The 'procompetitive' effects of trade policy reform in a small, open economy," Journal of International Economics, Elsevier, vol. 36(3-4), pages 391-411, May. [Downloadable!] (restricted)
  2. Goulder, Lawrence H. & Mathai, Koshy, 2000. "Optimal CO2 Abatement in the Presence of Induced Technological Change," Journal of Environmental Economics and Management, Elsevier, vol. 39(1), pages 1-38, January. [Downloadable!] (restricted)
  3. Thomas M. Steger, 2005. "Welfare Implications of Non-scale R&D-based Growth Models," Scandinavian Journal of Economics, Blackwell Publishing, vol. 107(4), pages 737-757, December. [Downloadable!] (restricted)
  4. Partha Sen & Stephen J. Turnovsky, 1989. "Deterioration of the Terms of Trade and Capital Accumulation: A Reexamination of the Laursen-Metzler Effect," NBER Working Papers 2616, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Benjamin Russo, 2004. "A cost-benefit analysis of R&D tax incentives," Canadian Journal of Economics, Canadian Economics Association, vol. 37(2), pages 313-335, May. [Downloadable!] (restricted)
  6. Goulder, Lawrence H. & Schneider, Stephen H., 1999. "Induced technological change and the attractiveness of CO2 abatement policies," Resource and Energy Economics, Elsevier, vol. 21(3-4), pages 211-253, August. [Downloadable!] (restricted)
  7. Alvarez-Pelaez, Maria J. & Groth, Christian, 2005. "Too little or too much R&D?," European Economic Review, Elsevier, vol. 49(2), pages 437-456, February. [Downloadable!] (restricted)
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  8. Otto, Vincent M. & Löschel, Andreas & Dellink, Rob, 2005. "Energy Biased Technical Change: A CGE Analysis," ZEW Discussion Papers 05-32, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
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  9. Bovenberg, A Lans & Goulder, Lawrence H, 1993. " Promoting Investment under International Capital Mobility: An Intertemporal General Equilibrium Analysis," Scandinavian Journal of Economics, Blackwell Publishing, vol. 95(2), pages 133-56.
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  10. Hwan C. Lin & Benjamin Russo, 2002. "Growth Effects of Capital Income Taxes: How Much Does Endogenous Innovation Matter?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 4(4), pages 613-640, October. [Downloadable!] (restricted)
  11. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-51, March. [Downloadable!] (restricted)
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  12. Leahy, Dermot & Neary, J Peter, 1999. "R&D Spillovers and the Case for Industrial Policy in an Open Economy," Oxford Economic Papers, Oxford University Press, vol. 51(1), pages 40-59, January.
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