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Optimal policy and non-scale growth with R&D externalities

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  • Valente, Simone

Abstract

An established result of the endogenous growth literature is that laissez-faire equilibria in expanding-varieties models are suboptimal due to the rent-effect: monopolistic pricing drives the equilibrium quantity of each intermediate input below the efficient level, implying that it is optimal to subsidize �final producers. This paper shows that, if scale effects are eliminated by introducing R&D spillovers, normative prescriptions change. Since the laissez-faire economy under-invests into R&D activity, the share of resources devoted to intermediates' production increases and this reallocation effect contrasts the rent-effect. In many scenarios, including the polar case of logarithmic preferences, the reallocation effect surely dominates. The equilibrium quantity of each intermediate exceeds the optimal level and the optimal policy consists of taxing, instead of subsidizing fi�nal producers because fi�scal authorities must redirect the extra-output generated by under-investment towards R&D activity.

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  • Valente, Simone, 2011. "Optimal policy and non-scale growth with R&D externalities," MPRA Paper 32473, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:32473
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    JEL classification:

    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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