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Quantitative growth effects of subsidies in a search theoretic R&D model


  • Benjamin Bental

    (Department of Economics, University of Haifa, Mount Carmel, Haifa - 31905, Israel)

  • Dan Peled

    (Department of Economics, University of Haifa, Mount Carmel, Haifa - 31905, Israel)


Should government subsidize R&D and does it matter how these subsidies are allocated? We examine these questions in a dynamic model where R&D is described as sequential sampling from a distribution of new ideas. Successful discoveries affect future available resources and incentives for further R&D. Consequently, there may be under-investment in R&D. We study the effect of government interventions aimed at fostering growth through R&D. Calibrating the model with aggregate data from the Israeli business sector allows us to quantitatively compare two forms of support resembling those actually used to encourage R&D in the Israeli business sector: (i) an unrestricted subsidy that may be used at the recipients' discretion to finance R&D or other investments, (ii) a subsidy earmarked by the government for R&D activities only. While there is no theoretical way to determine which of the two subsidies will have a greater impact on search for new ideas and growth, we find that in the calibrated economy both subsidies have a significant but similar impact on the economy's output and TFP growth rates. Accordingly, in the case of the Israeli business sector, the incentives to conduct R&D were sufficiently strong, and no R&D-specific encouragement was needed. However, a sensitivity analysis reveals that for economies characterized by other parameter values this result may not be true.

Suggested Citation

  • Benjamin Bental & Dan Peled, 2002. "Quantitative growth effects of subsidies in a search theoretic R&D model," Journal of Evolutionary Economics, Springer, vol. 12(4), pages 397-423.
  • Handle: RePEc:spr:joevec:v:12:y:2002:i:4:p:397-423

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    Cited by:

    1. Chhabra, Meenal & Das, Sanmay & Sarne, David, 2014. "Expert-mediated sequential search," European Journal of Operational Research, Elsevier, vol. 234(3), pages 861-873.
    2. Giovanni Cerulli, 2012. "Are R&D Subsidies Provided Optimally? Evidence from a Simulated Agency-Firm Stochastic Dynamic Game," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 15(1), pages 1-7.
    3. A. Minniti & C.P. Parello & P.S. Segerstrom, 2008. "A Schumpeterian Growth Model with Heterogenous Firms," Working Papers 645, Dipartimento Scienze Economiche, Universita' di Bologna.
    4. Grosfeld-Nir, Abraham & Sarne, David & Spiegler, Israel, 2009. "Modeling the search for the least costly opportunity," European Journal of Operational Research, Elsevier, vol. 197(2), pages 667-674, September.

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    Subsidies - R&D - Endogenous growth;


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