Subsidies, Entry, and Economic Growth in a Schumpeterian Model with Incumbents and Entrants

Lu, You-Xun and Chen, Shi-kuan and Lai, Ching-chong (2022): Subsidies, Entry, and Economic Growth in a Schumpeterian Model with Incumbents and Entrants.

Abstract

This paper explores the effects of various subsidies on economic growth and growth composition in a Schumpeterian model with incumbents and entrants. The main results can be summarized as follows. Subsidizing the production of intermediate goods or subsidizing incumbents’ in-house R&D serves to promote economic growth. However, the growth effect of the subsidy on entrants’ R&D can be positive or negative, depending on the level of the fixed entry cost. Moreover, we show that various types of subsidies have different effects on the entry of new firms and market structure. Finally, we calibrate the model and find that the subsidy on intermediate goods production is more effective than R&D subsidies in terms of promoting growth and raising welfare.

• Item Type: MPRA Paper
• Language: English
• Keywords: innovation, subsidies, economic growth, market structure, incumbents and entrants
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O31 - Innovation and Invention: Processes and Incentives; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O38 - Government Policy; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General

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