This paper presents a model to explain why both industry leaders and follower firms often invest in R&D and explores the welfare implications of these R&D investment choices. Regardless of initial conditions, the equilibrium path in this model involves gradually convergence to a balanced growth path and R&D subsidies have no effect on the balanced growth rate. Nevertheless, it is always optimal for the government to intervene by subsidizing the R&D expenditures of industry leaders and taxing the R&D expenditures of follower firms. Without government intervention, market forces generate too much creative destruction.
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|Date of creation:||12 Dec 1999|
|Date of revision:|
|Publication status:||Published in International Economic Review, 2007, pages 247-280.|
|Contact details of provider:|| Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden|
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