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Growth and Welfare Implications of Sector-Specific Innovations

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  • Ilhan Guner

    (Kent University)

Abstract

I examine the optimal government subsidy of R&D activities when sectors are heterogeneous. To this end, I build an endogenous growth model where R&D drives macroeconomic growth and firm dynamics in two sectors with different characteristics: a consumption-goods sector and an investment-goods sector. I highlight how various externalities in the innovation process affect the allocation of innovative resources across industries. I calibrate the model to U.S. data and study the quantitative properties of the model. By explicitly examining the transition path after the change in subsidy, I highlight the tradeoff between the short-run level of consumption and long-run growth. I find that the optimal combination of the subsidy rates, as a fraction of firm R&D expenditures, is 84 percent in consumption sector and 88 percent in investment sector. By moving from the baseline subsidy rates (10 percent in both sectors), society can achieve a 20 percent welfare gain in consumption equivalent terms. The annual GDP growth rate increases from 1.5 percent to 3.2 percent by this change in subsidy. Finally, I show that it is always optimal to subsidize R&D spending in investment sector at a higher rate than that in the consumption sector when the government's subsidy budget is limited. (Copyright: Elsevier)

Suggested Citation

  • Ilhan Guner, 2023. "Growth and Welfare Implications of Sector-Specific Innovations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 47, pages 204-245, January.
  • Handle: RePEc:red:issued:19-279
    DOI: 10.1016/j.red.2021.11.005
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    References listed on IDEAS

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    More about this item

    Keywords

    Endogenous growth; Innovation; Research and development; Investment specific technological change;
    All these keywords.

    JEL classification:

    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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