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Why it pays off to pay us well: The impact of basic research on economic growth and welfare

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  • Prettner, Klaus
  • Werner, Katharina

Abstract

We analyze the growth and welfare effects of governmental basic research investments in an R&D-based growth model with endogenous fertility and endogenous education. In line with the empirical evidence, our model accounts for (i) the negative effect of population growth on economic growth, (ii) the positive effect of education on economic growth, (iii) the positive association between the level of per capita GDP and expenditures for basic research, and (iv) the gestation lag of basic research investments. Our results indicate that there exists an interior long-run welfare-maximizing investment rate in basic research that is much higher than the rates observed in OECD countries. The model-based explanation that we provide for this discrepancy is that raising public investments in basic research toward the optimal level reduces the growth rate of GDP and welfare in the short run because taxes have to increase and resources have to be drawn away from other productive sectors of the economy. These adverse short-run welfare effects are one potential explanation for the reluctance of governments and their currently living voters to increase public R&D expenditures despite the long-run benefits of such a policy.

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  • Prettner, Klaus & Werner, Katharina, 2016. "Why it pays off to pay us well: The impact of basic research on economic growth and welfare," Research Policy, Elsevier, vol. 45(5), pages 1075-1090.
  • Handle: RePEc:eee:respol:v:45:y:2016:i:5:p:1075-1090
    DOI: 10.1016/j.respol.2016.03.001
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    2. Chen, Zhuo & Yang, Zhenbing & Yang, Lili, 2020. "How to optimize the allocation of research resources? An empirical study based on output and substitution elasticities of universities in Chinese provincial level," Socio-Economic Planning Sciences, Elsevier, vol. 69(C).
    3. Lehmann-Hasemeyer, Sibylle H. & Prettner, Klaus & Tscheuschner, Paul, 2020. "The scientific revolution and its role in the transition to sustained economic growth," Hohenheim Discussion Papers in Business, Economics and Social Sciences 06-2020, University of Hohenheim, Faculty of Business, Economics and Social Sciences.
    4. Fukuda, Katsufumi, 2019. "Effects of trade liberalization on growth and welfare through basic and applied researches," Journal of Macroeconomics, Elsevier, vol. 62(C).
    5. Xuesong Li & Yunlong Ding & Yuxuan Li, 2019. "M-Government Cooperation for Sustainable Development in China: A Transaction Cost and Resource-Based View," Sustainability, MDPI, vol. 11(7), pages 1-17, March.
    6. Qinghua Xia & Qinwei Cao & Manqing Tan, 2020. "Basic research intensity and diversified performance: the moderating role of government support intensity," Scientometrics, Springer;Akadémiai Kiadó, vol. 125(1), pages 577-605, October.
    7. Tscheuschner, Paul, 2021. "Endogenous life expectancy and R&D-based economic growth," Hohenheim Discussion Papers in Business, Economics and Social Sciences 01-2021, University of Hohenheim, Faculty of Business, Economics and Social Sciences.
    8. Nathalie Taverdet-Popiolek, 2022. "Economic Footprint of a Large French Research and Technology Organisation in Europe: Deciphering a Simplified Model and Appraising the Results," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 13(1), pages 44-69, March.
    9. Qinwei Cao, 2020. "Contradiction between input and output of Chinese scientific research: a multidimensional analysis," Scientometrics, Springer;Akadémiai Kiadó, vol. 123(1), pages 451-485, April.
    10. Prettner, Klaus & Strulik, Holger, 2020. "Innovation, automation, and inequality: Policy challenges in the race against the machine," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 249-265.
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    More about this item

    Keywords

    R&D-based growth; Basic science; Optimal governmental research policies; Endogenous schooling; Endogenous fertility;
    All these keywords.

    JEL classification:

    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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