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Growth and Welfare Implications of Sector-Specific Innovations

Güner, Ilhan (2022) Growth and Welfare Implications of Sector-Specific Innovations. Review of Economic Dynamics, . ISSN 1094-2025. (doi:10.1016/ (KAR id:70428)


I examine the optimal government subsidy of R&D activities when sectors are heterogeneous. To this end, I build an endogenous growth model where R&D drives macroeconomic growth and firm dynamics in two sectors with different characteristics: consumption-goods sector and investment-goods sector. I highlight how various externalities in the innovation process affect the allocation of innovative resources across industries. I calibrate the model to U.S. data and study the quantitative properties of the model. By explicitly examining the transition path after the change in subsidy, I highlight the tradeoff between the consumption level in the short run and the long-run growth. I find that the optimal combination of the subsidy rates as a fraction of firm R&D expenditures is 83 percent in consumption sector and 88 percent in investment sector. By moving from the baseline subsidy rates (10 percent in both sectors), the society can achieve 21 percent welfare gain in consumption equivalent terms. The annual GDP growth rate increases from 1.6 percent to 3.3 percent by this change in subsidy. I also analyze the optimal combination of R&D subsidies when the government budget is limited.

Item Type: Article
DOI/Identification number: 10.1016/
Uncontrolled keywords: Endogenous Growth, Innovation, Research and Development, Investment Specific Technological Change
Subjects: H Social Sciences > HB Economic Theory
Divisions: Divisions > Division of Human and Social Sciences > School of Economics
Depositing User: Ilhan Guner
Date Deposited: 28 Nov 2018 17:34 UTC
Last Modified: 30 Jul 2023 23:00 UTC
Resource URI: (The current URI for this page, for reference purposes)

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