Optimal research and development expenditure: a general equilibrium approach

Galo Nuño Barrau

No 1009, Working Papers from Banco de España

Abstract: How much should be spent in research and development (R&D)? How should R&D vary over the business cycle? In this paper we answer both questions in the context of a calibrated dynamic general equilibrium model with Schumpeterian endogenous growth. Firstly, we demonstrate that, although the existence of distortions in a decentralized economy produces underinvestment in R&D, a simple proportional subsidy to R&D spending alone cannot restore the first best allocation. The optimal proportional R&D subsidy attains a second best allocation in which R&D spending exceeds its first best level. Secondly, we show how the observed procyclicality of R&D is socially inefficient. However, the welfare loss due to this dynamic inefficiency is much smaller than the loss due to underinvestment in R&D.

Keywords: Schumpeterian growth; technology adoption; optimal subsidy (search for similar items in EconPapers)
JEL-codes: E32 O38 O40 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2010-03
New Economics Papers: this item is included in nep-dge, nep-ino, nep-mac and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1009

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