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The Importance of Industrial Policy in Quality-Ladder Growth Models

Giordani, Paolo E. and Zamparelli, Luca (2007): The Importance of Industrial Policy in Quality-Ladder Growth Models.

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We extend the class of quality-ladder growth models (Grossman- Helpman (1991), Segerstrom (1998) and others), to encompass an economy with asymmetric fundamentals. In contrast to the standard framework, in our model industries may di¤er 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 �rst 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 pro�t taxation policy increases economic growth and social welfare above the laissez-faire.

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