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Effects of subsidies on growth and welfare in a quality-ladder model with elastic labor

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  • Hu, Ruiyang
  • Yang, Yibai
  • Zheng, Zhijie

Abstract

This paper develops a quality-ladder growth model with elastic labor supply and distortionary taxes to analyze the effects of different subsidy instruments: subsidies to the production of final goods, subsidies to the purchase of intermediate goods, and subsidies to research and development (R&D). The model is calibrated to the US data to compare the growth and welfare implications of these subsidies. The main results are as follows. First, a coordination of all instruments attains the social optimum. Second, as for the use of a single instrument, the R&D subsidy is less growth-enhancing and welfare-improving than the other subsidies. Finally, as for the use of a mix of any two instruments, subsidizing the production of final goods and the purchase of intermediate goods is most effective in promoting growth but least effective in raising welfare.

Suggested Citation

  • Hu, Ruiyang & Yang, Yibai & Zheng, Zhijie, 2019. "Effects of subsidies on growth and welfare in a quality-ladder model with elastic labor," MPRA Paper 96801, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:96801
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    More about this item

    Keywords

    Economic Growth; R&D; Quality Ladder; Subsidies;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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