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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.

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Abstract

This paper explores the effects of various subsidies in a Schumpeterian model with incumbents and entrants. We find that 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 is ambiguous. 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.

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