Haste makes waste? Quantity-based subsidies under heterogeneous innovations

Linyi Cao, Helu Jiang, Guangwei Li and Lijun Zhu

Journal of Monetary Economics, 2024, vol. 142, issue C

Abstract: With quantity-based innovation targets and subsidy programs launched since the mid-2000s, China has seen a patent surge, accounting for 46% of the world’s total patent applications in 2020; however, the overall patent quality has been declining after 2008. This paper develops a Schumpeterian growth model featuring innovating firms’ quantity–quality trade-off between radical and incremental innovations, and decomposes subsidies’ aggregate impact into quantity and quality channels. We calibrate the model to Chinese firm-level data in the early 2010s. Our quantitative analysis shows that the quality channel effects are negative and dominant, and quantity-based subsidies in that period reduce the TFP growth rate and welfare by 0.19 percentage points and 3.31%, respectively. We evaluate welfare gains under a constrained planner’s problem, and propose skill subsidies which are quality-biased and effectively recover the optimal allocation.

Keywords: Heterogeneous innovations; Quantity-based subsidies; Human capital (search for similar items in EconPapers)
JEL-codes: O31 O38 O40 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:142:y:2024:i:c:s0304393223001046

DOI: 10.1016/j.jmoneco.2023.09.004

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