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Should the US increase subsidies to R&D? Lessons from an endogenous growth theory

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  • Manuel A. Gómez
  • Tiago Neves Sequeira

Abstract

In this article we devise an endogenous growth model with R&D, physical capital, and human capital with several externalities. The model is calibrated to the US economy and used to quantitatively evaluate the effect on growth and welfare of implementing different budget-neutral policies. The welfare effects of different policies are calculated by taking into account the transitional dynamics of the economy after the policy reform. Our main findings have policy implications; mainly, subsidies to research are the most welfare-increasing amongst the budget-neutral policies, and the optimal structure of subsidies entails substantially increasing the subsidy to R&D, maintaining a zero subsidy to production, and reducing the subsidy to education, so as to keep the intertemporal government budget balanced. A detailed sensitivity analysis shows the robustness of these results. Copyright 2014 Oxford University Press 2013 All rights reserved, Oxford University Press.

Suggested Citation

  • Manuel A. Gómez & Tiago Neves Sequeira, 2014. "Should the US increase subsidies to R&D? Lessons from an endogenous growth theory," Oxford Economic Papers, Oxford University Press, vol. 66(1), pages 254-282, January.
  • Handle: RePEc:oup:oxecpp:v:66:y:2014:i:1:p:254-282
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    File URL: http://hdl.handle.net/10.1093/oep/gpt007
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    Cited by:

    1. Voyvoda, Ebru & Yeldan, Erinç, 2015. "Public policy and growth in Canada: An applied endogenous growth model with human and knowledge capital accumulation," Economic Modelling, Elsevier, vol. 50(C), pages 298-309.
    2. Gómez, Manuel A. & Sequeira, Tiago N., 2014. "Should the US streamline its tax system? Analysis on an endogenous growth model," Economic Modelling, Elsevier, vol. 37(C), pages 113-119.
    3. Óscar Afonso & Tiago Sequeira, 2017. "Tradable and nontradable directed technical change," CEFAGE-UE Working Papers 2017_02, University of Evora, CEFAGE-UE (Portugal).
    4. Yibai Yang, 2018. "On the Optimality of IPR Protection with Blocking Patents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 27, pages 205-230, January.
    5. repec:eee:respol:v:47:y:2018:i:4:p:750-767 is not listed on IDEAS
    6. Chen, Ping-ho & Chu, Hsun & Lai, Ching-Chong, 2015. "Do R&D subsidies necessarily stimulate economic growth?," MPRA Paper 66061, University Library of Munich, Germany.

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