R&D Subsidies and Economic Growth
We present an endogenous growth model in which some firms devote resources to developing higher-quality products (innovative R&D) and other firms devote resources to copying these products (imitative R&D). Although consumers benefit from the knowledge created by both types of R&D activities, only innovative R&D subsidies lead to faster economic growth; imitative R&D subsidies actually lead to slower economic growth. A key assumption driving these conclusions is that R&D activities are subject to decreasing returns. When R&D activities are subject to constant returns, as is commonly assumed, the only equilibrium with both innovation and imitation is unstable.
Volume (Year): 29 (1998)
Issue (Month): 3 (Autumn)
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