Should Governments Subsidize Resource-Using Variety-Expanding Innovation or Resource-Substituting Innovation?

Riku Watanabe () and Ken Tabata ()
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Riku Watanabe: Department of Economics, Kagawa University
Ken Tabata: School of Economics, Kwansei Gakuin University

No 314, Discussion Paper Series from School of Economics, Kwansei Gakuin University

Abstract: This study introduces endogenous resource-substituting innovation into a variety-expanding endogenous growth model with polluting non-renewable resources. The resulting task-based framework highlights the trade-off between resource-using variety-expanding innovation and resource-substituting innovation. We examine how subsidies for these two types of innovation affect economic growth and welfare, and how environmental policies that slow resource extraction and mitigate pollution shape these effects. Subsidies for new-variety R&D promote growth through faster variety expansion but reduce it through greater reliance on resource extraction, reflected in a lower share of firms adopting resource-substituting production methods and higher resource intensity in aggregate production. Subsidies for resource-substituting innovation have the opposite effects. Calibrating the model, we find that raising subsidies for new-variety R&D is more likely to improve welfare in resource-rich economies, whereas raising subsidies for resource-substituting innovation is more likely to improve welfare in resource-poor economies. We also find that more stringent environmental policies that conserve resources and mitigate pollution strengthen the welfare gains from subsidies for resource-substituting innovation, while weakening those from new-variety R&D subsidies.

Keywords: Non-Renewable Resources; Resource-Substituting Innovation; R&D-based Growth (search for similar items in EconPapers)
JEL-codes: O31 O44 Q55 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2026-09
New Economics Papers: this item is included in nep-cse, nep-sbm and nep-uep
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Persistent link: https://EconPapers.repec.org/RePEc:kgu:wpaper:314

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