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

  • Bye, Brita
  • Fæhn, Taran
  • Heggedal, Tom-Reiel
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    We explore how innovation incentives in a small, open economy should be designed in order to achieve the highest welfare and growth. The computable general equilibrium model we develop for the purpose allows for research and development (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. In spite of breeding stronger economic growth, a higher number of patents, and a higher share of R&D in total production, direct R&D support generates slightly less welfare than subsidising formation of capital varieties. The costs in terms of welfare relates to a lower production within each variety firm, which in presence of mark-up pricing results in efficiency losses.

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    Article provided by Elsevier in its journal Economic Modelling.

    Volume (Year): 26 (2009)
    Issue (Month): 5 (September)
    Pages: 1075-1088

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    Handle: RePEc:eee:ecmode:v:26:y:2009:i:5:p:1075-1088
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