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Public Spending in an OLG Economy with Endogenous Technological Change - Financing Matters -

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  • Amer TABAKOVIĆ

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Abstract

This paper introduces a government in an overlapping generations economy where long-run growth is the result of purposeful investments in a research sector that creates new technological knowledge. The government provides a subsidy to the re- search sector and pays for its spending by raising taxes and/or issuing debt. A debt- financed research subsidy cannot lead to a higher long-run growth rate than the one obtained in a competitive equilibrium of an otherwise equivalent economy without government. Instead, we show that paying for the subsidy entirely by raising taxes is advantageous from a long-run growth perspective. However, our analysis indicates that neither financing scenario is Pareto-improving as the initially old generation always suffers a welfare loss.

Suggested Citation

  • Amer TABAKOVIĆ, 2019. "Public Spending in an OLG Economy with Endogenous Technological Change - Financing Matters -," Departmental Working Papers 2019-08, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    • Handle: RePEc:mil:wpdepa:2019-08
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    File URL: http://wp.demm.unimi.it/files/wp/2019/DEMM-2019_08wp.pdf
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    References listed on IDEAS

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    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Agénor, Pierre-Richard & Neanidis, Kyriakos C., 2015. "Innovation, public capital, and growth," Journal of Macroeconomics, Elsevier, vol. 44(C), pages 252-275.
    3. Gilles Saint-Paul, 1992. "Fiscal Policy in an Endogenous Growth Model," The Quarterly Journal of Economics, Oxford University Press, vol. 107(4), pages 1243-1259.
    4. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
    5. Pierre-Richard Agenor & S. Devrim Yilmaz, 2011. "The tyranny of rules: fiscal discipline, productive spending, and growth in a perfect foresight model," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 14(1), pages 69-99.
    6. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-247, April.
    7. Futagami, Koichi & Morita, Yuichi & Shibata, Akihisa, 1993. " Dynamic Analysis of an Endogenous Growth Model with Public Capital," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(4), pages 607-625, December.
    8. Moraga, Jesãšs Fernã Ndez-Huertas & Vidal, Jean-Pierre, 2010. "Fiscal sustainability and public debt in an endogenous growth model," Journal of Pension Economics and Finance, Cambridge University Press, vol. 9(2), pages 277-302, April.
    9. Kenneth J. Arrow, 1962. "The Economic Implications of Learning by Doing," Review of Economic Studies, Oxford University Press, vol. 29(3), pages 155-173.
    10. Yakita, Akira, 2008. "Sustainability of public debt, public capital formation, and endogenous growth in an overlapping generations setting," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 897-914, April.
    11. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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    More about this item

    Keywords

    Productive public spending; Debt issuance; Endogenous technical change; Long-run growth;

    JEL classification:

    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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