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Subsidies in an Economy with Endogenous Cycles Over Neoclassical Investment and Neo-Schumpeterian Innovation Regimes

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  • Bei Li

    (Business School, University of Western Australia)

  • Jie Zhang

    (Department of Economics National University of Singapore)

Abstract

We explore the roles of subsidies in the Matsuyama model (1999) of growth through cycles alternating perpetually between two phases featuring neoclassical investment and neo-Schumpeterian innovation respectively. Subsidies to R&D investment or to the purchase of newly invented intermediate goods can arbitrarily reduce the threshold level of capital per type of intermediate good, beyond which the economy moves from the investment phase to the innovation phase. More importantly, such subsidies can mitigate and eventually eliminate cycles for ignificant welfare gains that can be equivalent to as much as 10% rises in consumption at all times.

Suggested Citation

  • Bei Li & Jie Zhang, 2011. "Subsidies in an Economy with Endogenous Cycles Over Neoclassical Investment and Neo-Schumpeterian Innovation Regimes," Economics Discussion / Working Papers 11-23, The University of Western Australia, Department of Economics.
  • Handle: RePEc:uwa:wpaper:11-23
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    References listed on IDEAS

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