Effects of R&D Subsidies in a Hybrid Model of Endogenous Growth and Semi-Endogenous Growth

Chu, Angus C. and Wang, Xilin (2019): Effects of R&D Subsidies in a Hybrid Model of Endogenous Growth and Semi-Endogenous Growth.

Abstract

This study explores the effects of R&D subsidies in a hybrid growth model in which the economy may exhibit semi-endogenous growth or fully endogenous growth. We consider two types of R&D subsidies on variety-expanding innovation and quality-improving innovation. R&D subsidies on quality-improving innovation only have effects in the fully-endogenous-growth regime, in which a higher subsidy rate leads to an earlier activation of quality-improving innovation and increases the transitional and steady-state growth rate. R&D subsidies on variety-expanding innovation have contrasting effects in the two regimes. In the semi-endogenous-growth regime, a higher subsidy rate on variety-expanding innovation increases transitional growth but has no effect on steady-state growth. In the fully-endogenous-growth regime, a higher subsidy rate on variety-expanding innovation continues to increase short-run growth but delays the activation of quality-improving innovation and reduces long-run growth. Increasing R&D subsidies on variety-expanding (quality-improving) innovation makes the semi-endogenous-growth (fully-endogenous-growth) regime more likely to emerge in equilibrium.

• Item Type: MPRA Paper
• Language: English
• Keywords: R&D subsidies; innovation; endogenous growth regimes
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights

References

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

Ashraf, Q., and Galor, O., 2011. Dynamics and stagnation in the Malthusian epoch. American Economic Review, 101, 2003-41.

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

Chu, A., Kou, Z., and Wang, X., 2019. Effects of patents on the transition from stagnation to growth. MPRA Working Papers 94239.

Cozzi, G., 2017a. Endogenous growth, semi-endogenous growth... or both? A simple hybrid model. Economics Letters, 154, 28-30.

Cozzi, G., 2017b. Combining semi-endogenous and fully endogenous growth: A generalization. Economics Letters, 155, 89-91.

Galor, O., 2011. Unified Growth Theory. Princeton University Press.

Galor, O., and Moav, O., 2002. Natural selection and the origin of economic growth. Quarterly Journal of Economics, 117, 1133-1192.

Galor, O., and Mountford, A., 2008. Trading population for productivity: Theory and evidence. Review of Economic Studies, 75, 1143-1179.

Galor, O., and Weil, D., 2000. Population, technology and growth: From the Malthusian regime to the demographic transition. American Economic Review, 110, 806-828.

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

Grossman, G., and Helpman, E., 1991b. Innovation and Growth in the Global Economy. The MIT Press.

Ha, J., and Howitt, P., 2007. Accounting for trends in productivity and R&D: A Schumpeterian critique of semi-endogenous growth theory. Journal of Money, Credit, and Banking, 33, 733-74.

Hansen, G., and Prescott, E., 2002. Malthus to Solow. American Economic Review, 2002, 92, 1205-1217.

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

Hu, R., Yang, Y., and Zheng, Z., 2019. Optimal subsidies in a quality-ladder growth model with elastic labor. University of Macau Working Paper.

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

Jones, C., 1995. R&D-based models of economic growth. Journal of Political Economy, 103, 759-784.

Jones, C., 2001. Was an industrial revolution inevitable? Economic growth over the very long run. B.E. Journal of Macroeconomics (Advances), 1, 1-45.

Laincz, C., and Peretto, P., 2006. Scale effects in endogenous growth theory: An error of aggregation not specification. Journal of Economic Growth, 11, 263-288.

Lin, H., 2002. Shall the Northern optimal R&D subsidy rate inversely respond to Southern intellectual property protection?. Southern Economic Journal, 69, 381-397.

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

Peretto, P., 1999. Cost reduction, entry, and the interdependence of market structure and economic growth. Journal of Monetary Economics, 43, 173-195.

Peretto, P., 2007. Corporate taxes, growth and welfare in a Schumpeterian economy. Journal of Economic Theory, 137, 353-382.

Peretto, P., 2015. From Smith to Schumpeter: A theory of take-off and convergence to sustained growth. European Economic Review, 78, 1-26.

Peretto, P., and Connolly, M., 2007. The Manhattan metaphor. Journal of Economic Growth, 12, 329-50.

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

Segerstrom, P., 1998. Endogenous growth without scale effects. American Economic Review, 88, 1290-1310.

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.

Smulders, S. and van de Klundert T., 1995. Imperfect competition, concentration and growth with firm-specific R&D. European Economic Review, 39, 139-160.

Yang, Y., 2018. On the optimality of IPR protection with blocking patents. Review of Economic Dynamics, 27, 205-230.

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.