Technological Rivalry and Optimal Dynamic Policy in an Open Economy

Yan Bai, Keyu Jin and Dan Lu

Journal of Political Economy Macroeconomics, 2025, vol. 3, issue 3, 382 - 417

Abstract: We investigate optimal dynamic policies in an open economy where technology is endogenously accumulated through innovation. Our key insight is that even when private innovation allocations are (Pareto) efficient, a country has incentives to influence foreign innovation efforts across sectors and over time. We derive explicit expressions for optimal taxes linked to both intratemporal and intertemporal motives to manipulate foreign technology. To affect forward-looking innovation decisions in a foreign country, a home government uses committed future trade policies (Ramsey) or innovation policies (Markov); to affect intratemporal prices, the home country imposes higher tariffs in sectors where it has a comparative advantage.

Date: 2025
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