Effects of subsidies on growth and welfare in a quality-ladder model with elastic labor

Hu, Ruiyang and Yang, Yibai and Zheng, Zhijie (2019): Effects of subsidies on growth and welfare in a quality-ladder model with elastic labor.

Abstract

This paper develops a quality-ladder growth model with elastic labor supply and distortionary taxes to analyze the effects of different subsidy instruments: subsidies to the production of final goods, subsidies to the purchase of intermediate goods, and subsidies to research and development (R&D). The model is calibrated to the US data to compare the growth and welfare implications of these subsidies. The main results are as follows. First, a coordination of all instruments attains the social optimum. Second, as for the use of a single instrument, the R&D subsidy is less growth-enhancing and welfare-improving than the other subsidies. Finally, as for the use of a mix of any two instruments, subsidizing the production of final goods and the purchase of intermediate goods is most effective in promoting growth but least effective in raising welfare.

• Item Type: MPRA Paper
• Language: English
• Keywords: Economic Growth; R&D; Quality Ladder; Subsidies
• Subjects: D - Microeconomics > D6 - Welfare Economics > D61 - Allocative Efficiency ; Cost-Benefit Analysis; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O31 - Innovation and Invention: Processes and Incentives; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O38 - Government Policy

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