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Boosting innovation or entry: What increases output more?

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  • Shah, Rohan

Abstract

Governments spend substantial sums subsidising firm investment in Research and Development (R&D) with the aim of increasing output. How effective are these subsidies? Could alternative policies boost output more? I develop a quantitative model of the US economy in which heterogeneous firms choose R&D, physical capital, and debt subject to a collateral constraint distinguishing between physical capital and R&D. I find that negative spillovers from higher aggregate R&D render R&D subsidies largely ineffective at increasing output. Conversely, subsidising entry instead of R&D achieves ten times the increase in output because entry subsidies do not generate large negative R&D spillovers. My results suggest that a policymaker seeking to increase output should focus on incentivising entry rather than R&D.

Suggested Citation

  • Shah, Rohan, 2025. "Boosting innovation or entry: What increases output more?," Economic Modelling, Elsevier, vol. 153(C).
    • Handle: RePEc:eee:ecmode:v:153:y:2025:i:c:s0264999325003098
    DOI: 10.1016/j.econmod.2025.107314
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    Keywords

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    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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