The Importance of Industrial Policy in Quality-Ladder Growth Models

Abstract

We extend the class of quality-ladder growth models (Grossman and Helpman, 1991, Segerstrom, 1998 and others), to encompass an economy with asymmetric fundamentals. In contrast to the standard framework, in our model industries may differ in terms of their innovative potential (quality jumps and arrival rates) and consumers' preferences. This extension allows us to bring industrial policy back into the realm of the growth policy debate. We first show that it is always possible to raise the long-run growth rate and the social welfare of the economy through a costless tax/subsidy scheme reallocating resources towards the relatively more promising industries. We then prove that, in certain economies, even a mere profit taxation policy increases economic growth and social welfare above the laissez-faire.

The Dynamic Properties of Endogenous Growth Models

“…For example, Jones (2003) shows that an R&D subsidy lowers the steady state growth rate if fertility is endogenous. Giordani and Luca (2008) aim to restore policy impacts on steady state growth by building a Jones model without razor's-edge conditions, but where industries differ in innovative potential. They show that an industrial policy of lumpsum taxation of low-potential industries to fund R&D subsidies in high-potential industries can boost steady state growth.…”

“…The scale effect is absent and is eliminated by imposing the most general parameter restrictions upon the model that are consistent with a steady state [see Eicher and Turnovsky (1999); Jones (1999)]. Many semiendogenous growth models, such as those developed in Jones (1995aJones ( , 1995bJones ( , 1999Jones ( , 2001Jones ( , 2003, Kortum (1997), Dinopoulas and Thompson (1998), Segerstrom (1998), and Giordani and Luca (2008) assume that labor is the only rival input in the production of output and new ideas. Clearly, transitional dynamics and stability properties are not an issue in a one-factor model.…”

On robust asymmetric equilibria in asymmetric R&D-driven growth economies

“…Finally we can plug (17) and (18) into (14) and (15) in order to obtain the optimal pair (! ; t), " (!…”

“…as the size of quality improvements (the so-called "quality jump"), assumed to be industry-speci…c to allow for asymmetry in the technical evolution of each line, j max (! ; t) as the highest quality reached by product 4 The model developed in this section is in many respects similar to the one in Giordani and Zamparelli (2008), the main substantial di¤erence being that here we adopt the "TEG speci…cation" to capture the increasing complexity of the innovation process, in contrast with the "PEG speci…cation" adopted in that paper (see below for details).…”

Protectionism under R&D policy: innovation rate and welfare

“…Gonzales et al (2005)'s results suggest that subsidies stimulate R&D and some firms would stop performing in their absence. Giordani and Zamparelli (2008) show that it is always possible to raise the long‐run growth rate and the social welfare of the economy through a costless tax/subsidy scheme reallocating resources towards the relatively more promising industries. Yin (1999) finds that if the government of the host country provides more tax relief for foreign firms, this will raise total output.…”