Defense R&D: Effects on Economic Growth and Social Welfare

Chu, Angus C. and Lai, Ching-Chong (2009): Defense R&D: Effects on Economic Growth and Social Welfare.

Abstract

In the US, defense R&D share of GDP has decreased significantly since 1960. To analyze the implications on economic growth and welfare, we develop an R&D-based growth model that features the commonly discussed crowding-out and spillover effects of defense R&D on civilian R&D. The model also captures the important effects of defense technology on (a) national security and (b) aggregate productivity via the spin-off effect resembling consumption public goods and productive public goods respectively. In this framework, economic growth is driven by market-based civilian R&D as in standard R&D growth models and government-financed public goods (i.e. defense R&D) as in Barro (1990). We find that defense R&D has an inverted-U-shape effect on growth, and the growth-maximizing level of defense R&D is increasing in the spillover effect and in the spin-off effect. Also, there is a welfare-maximizing level of defense R&D that is increasing in the security effect of national defense, and there exists a critical degree of this security effect below (above) which the welfare-maximizing level of defense R&D is below (above) the growth-maximizing level.

• Item Type: MPRA Paper
• Language: English
• Keywords: defense R&D; economic growth; public goods; social welfare
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O41 - One, Two, and Multisector Growth Models; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O38 - Government Policy; H - Public Economics > H5 - National Government Expenditures and Related Policies > H56 - National Security and War

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