Should the Government Subsidize Innovation or Automation?

Chu, Angus C. and Cozzi, Guido and Furukawa, Yuichi and Liao, Chih-Hsing (2018): Should the Government Subsidize Innovation or Automation?

Abstract

This study introduces automation into a Schumpeterian growth model to explore the effects of R&D and automation subsidies. R&D subsidy increases innovation and growth but decreases the share of automated industries and the degree of capital intensity in the aggregate production function. Automation subsidy has the opposite effects on these macroeconomic variables. Calibrating the model to US data, we find that raising R&D subsidy increases the welfare of high-skill workers but decreases the welfare of low-skill workers and capital owners, whereas increasing automation subsidy increases the welfare of high-skill workers and capital owners but decreases the welfare of low-skill workers.

• Item Type: MPRA Paper
• Language: English
• Keywords: automation, innovation, economic growth
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity

References

Acemoglu, D., and Akcigit, U., 2012. Intellectual property rights policy, competition and innovation. Journal of the European Economic Association, 10, 1-42.

Acemoglu, D., and Restrepo, P., 2018. The race between man and machine: Implications of technology for growth, factor shares and employment. American Economic Review, 108, 1488-1542.

Aghion, P., and Howitt, P., 1992. A model of growth through creative destruction. Econometrica, 60, 323-351.

Aghion, P., Jones, B., and Jones, C., 2017. Artificial intelligence and economic growth. NBER Working Paper No. 23928.

Agrawal, A., Gans, J., and Goldfarb, A., 2018. The Economics of Artificial Intelligence: An Agenda. Forthcoming from the University of Chicago Press.

Chen, P., Chu, A., Chu, H., and Lai, C., 2019. Optimal capital taxation in an economy with innovation-driven growth. MPRA Working Paper No. 92319.

Chu, A., and Cozzi, G., 2018. Effects of patents versus R&D subsidies on income inequality. Review of Economic Dynamics, 29, 68-84.

Chu, A., Cozzi, G., Furukawa, Y., and Liao, C., 2018. Should the government subsidize innovation or automation?. MPRA Working Paper No. 88276.

Chu, A., Furukawa, Y., and Ji, L., 2016. Patents, R&D subsidies and endogenous market structure in a Schumpeterian economy. Southern Economic Journal, 82, 809-825.

Cozzi, G., 2007. The Arrow effect under competitive R&D. The B.E. Journal of Macroeconomics (Contributions), 7, Article 2.

Cozzi, G., Giordani, P., and Zamparelli, L., 2007. The refoundation of the symmetric equilibrium in Schumpeterian growth models. Journal of Economic Theory, 136, 788-797.

Dinopoulos, E., and Segerstrom, P., 2010. Intellectual property rights, multinational firms and economic growth. Journal of Development Economics, 92, 13-27.

Evans, L., Quigley, N., and Zhang, J., 2003. Optimal price regulation in a growth model with monopolistic suppliers of intermediate goods. Canadian Journal of Economics, 36, 463-474.

Frey, C., and Osborne, M., 2017. The future of employment: How susceptible are jobs to computerisation? Technological Forecasting and Social Change, 114, 254-280.

Galor, O., and Moav, O., 2002. Natural selection and the origin of economic growth. Quarterly Journal of Economics, 117, 1133-1191.

Grossman, G., and Helpman, E., 1991. Quality ladders in the theory of growth. Review of Economic Studies, 58, 43-61.

Hemous, D., and Olsen, M., 2018. The rise of the machines: Automation, horizontal innovation and income inequality. SSRN Working Paper No. 2328774.

Howitt, P., 1999. Steady endogenous growth with population and R&D inputs growing. Journal of Political Economy, 107, 715-730.

Impullitti, G., 2010. International competition and U.S. R&D subsidies: A quantitative welfare analysis. International Economic Review, 51, 1127-1158.

Jones, C., and Williams, J., 2000. Too much of a good thing? The economics of investment in R&D. Journal of Economic Growth, 5, 65-85.

Laitner, J., and Stolyarov, D., 2004. Aggregate returns to scale and embodied technical change: Theory and measurement. Journal of Monetary Economics, 51, 191-233.

Peretto, P., 1998. Technological change and population growth. Journal of Economic Growth, 3, 283-311.

Peretto, P., and Seater, J., 2013. Factor-eliminating technological change. Journal of Monetary Economics, 60, 459-473.

Prettner, K., and Strulik, H., 2017. The lost race against the machine: Automation, education, and inequality in an R&D-based growth model. Hohenheim Discussion Papers in Business, Economics, and Social Sciences 08-2017.

Romer, P., 1990. Endogenous technological change. Journal of Political Economy, 98, S71-S102.

Segerstrom, P. 2000. The long-run growth effects of R&D subsidies. Journal of Economic Growth, 5, 277--305.

Segerstrom, P., Anant, T., and Dinopoulos, E., 1990. A Schumpeterian model of the product life cycle. American Economic Review, 80, 1077-91.

Trimborn, T., Koch, K., Steger, T., 2008. Multi-dimensional transitional dynamics: A simple numerical procedure. Macroeconomic Dynamics, 12, 301-319.

Zeira, J., 1998. Workers, machines, and economic growth. Quarterly Journal of Economics, 113, 1091-1117.

Zeira, J., 2006. Machines as engines of growth. CEPR Discussion Paper No. 5429.

Zeng, J., and Zhang, J., 2007. Subsidies in an R&D growth model with elastic labor. Journal of Economic Dynamics and Control, 31, 861-886.