EFFECTS OF R&D SUBSIDIES IN A HYBRID MODEL OF ENDOGENOUS GROWTH AND SEMI-ENDOGENOUS GROWTH

Abstract

We explore R&D subsidies in a hybrid growth model which may exhibit semi-endogenous growth or fully endogenous growth. We consider two types of subsidies on variety-expanding innovation and quality-improving innovation. R&D subsidies on quality-improving innovation only have effects in the fully endogenous-growth regime, in which more subsidies cause an earlier activation of quality-improving innovation and increase the transitional/steady-state growth rate. R&D subsidies on variety-expanding innovation have contrasting effects in the two regimes. In the semi-endogenous-growth regime, more subsidies on variety-expanding innovation increase transitional growth but have no effect on steady-state growth. In the fully endogenous-growth regime, more subsidies on variety-expanding innovation continue to increase short-run growth but delay the activation of quality-improving innovation and reduce long-run growth. Increasing subsidies on variety-expanding (quality-improving) innovation makes the semi-endogenous-growth (fully endogenous-growth) regime more likely to emerge. Finally, we calibrate the model and find that under reasonable parameter values, the fully endogenous-growth regime is more likely to emerge.

Technology adoption, innovation policy and catching-up.

“…Models in the second approach are set to explore either the ability to increase product variety, to improve product-quality, or simply to produce ideas (Romer 1990;Aghion and Howitt 1992;Howitt 1999;Peretto 1999;Jones 2005;Chu and Wang 2022). These models, however, are not explicitly designed to explore the driving factors of convergence across countries.…”

“…As mentioned, our paper relates also to the research on policy/institutional mechanism, like taxes and subsidies, that influence investment and innovation. The association between subsidies and innovation has been studied by, among many others (Romer 1990;Grossman and Helpman 1991;Jones 1995Jones , 2005Segerstrom 1998Segerstrom , 2000Zeng and Zhang 2007;Chu and Wang 2022). Unlike the most standard approach in those models which take subsidies for granted, the "tax and subsidy mechanism" in our approach builds on a simple general equilibrium setting with net consumption taxes-net of effective investment-and a tight balanced budget condition.…”

“…The recent literature on innovation has reignited the debate about the relationship between technology progress and economic growth over the long run. In particular, it has spurred controversy about: (a) the relative importance of technology diffusion from abroad over (local) innovation in explaining convergence across countries (Romer 1993;Barro and Sala-i-Martin 1997;Keller 2004;Acemoglu et al 2006;Aghion and Howitt 2006;OECD 2007); the merits of fiscal policy mechanisms designed to boost innovation (Crespi 2012;Denes et al 2020;Chu and Wang 2022).…”

“…Indeed, in addition to be a frequent topic of empirical research (Reppy 1977;Lichtenberg 1988;Lerner 1999;Pagés 2010;Nanda et al 2015;Kerr and Nanda 2015;Howell 2017;Denes et al 2020;Hu 2020), the theoretical reasoning that justifies the use of fiscal instruments to boost innovation and long-run growth has received considerable attention in growth literature (Romer 2000;Segerstrom 1998Segerstrom , 2000Zeng and Zhang 2007;Chu and Wang 2022). In fact, the role of government in financing innovation-led growth has been popularized by Mazzucato (2013) and Mazzucato and Penna (2015), among others.…”

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

“…This study relates to the vast literature that explore the effects of R&D subsidies in innovation‐driven growth models; see for example, Dinopoulos and Syropoulos (2007), Impullitti (2010), Lin (2002), Segerstrom (1998), Şener (2008), and Chu and Cozzi (2018), in which either variety expansion or quality improvement is considered as the process of innovation, in addition to Chu et al (2016), Peretto (1998), Segerstrom (2000), and Chu and Wang (2022), in which the two dimensions of innovation are combined. While inspiring, the aforementioned studies mainly focus on financing subsidy costs with nondistortionary taxes, ruling out the distortionary effects of taxes on the aggregate equilibrium allocation.…”