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Welfare and growth impacts of innovation policies in a small, open economy. An applied general equilibrium analysis

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    We explore how innovation incentives in a small, open economy should be designed in order to achieve the highest welfare and growth, by means of a computable general equilibrium model with R&D-driven endogenous technological change embodied in varieties of capital. We study policy alternatives targeted towards R&D, capital varieties formation, and domestic investments in capital varieties. Subsidising domestic investments, thereby excluding stimuli to world market deliveries, generates less R&D, capital formation, economic growth, and welfare, than do the other alternatives, reflecting that the domestic market for capital varieties is limited. Directing support to R&D rather than to capital formation generates stronger economic growth, a higher number of patents and capital varieties, and a higher share of R&D in total production. However, it costs in terms of lower production within each firm, where presence of sunk patent costs and mark-ups result in efficiency losses. The welfare result is, thus, slightly lower.

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    Paper provided by Statistics Norway, Research Department in its series Discussion Papers with number 510.

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    Date of creation: Jul 2007
    Date of revision:
    Handle: RePEc:ssb:dispap:510
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    14. Goulder, Lawrence H. & Schneider, Stephen H., 1999. "Induced technological change and the attractiveness of CO2 abatement policies," Resource and Energy Economics, Elsevier, vol. 21(3-4), pages 211-253, August.
    15. Bovenberg, A.L. & Goulder, L.H., 1993. "Promoting investment under international capital mobility : An intertemporal general equilibrium analysis," Other publications TiSEM 29893d08-baf5-491e-9404-3, Tilburg University, School of Economics and Management.
    16. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
    17. Markusen, James R., 1981. "Trade and the gains from trade with imperfect competition," Journal of International Economics, Elsevier, vol. 11(4), pages 531-551, November.
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