Welfare Analysis in a Schumpeterian Growth Model with Capital

Marcus Hagedorn, Ashok Kaul () and Volker Reinthaler ()
Additional contact information
Ashok Kaul: Saarland University
Volker Reinthaler: University of Bonn

No 283, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: In this note we compare the laissez-faire steady-state solution in the Howitt and Aghion (1998) model to the social optimum. The analysis offers several new insights in comparison to the welfare analysis in Aghion and Howitt (1992). We find various new distortions between private and optimal solution. First, a monopoly distortion effect generates too little capital accumulation in the private solution because households’ gross return per unit of capital will be lower than in the social optimum due to monopoly power. Second, a cost-benefit gap effect leads to excessive research in the private solution because the planner is interested in the average technology whereas the private researcher is interested in the leading edge technology. Third, we decompose the well-known intertemporal spillover effect into three subeffects and clarify why the planner uses the interest rate as discount rate.

Keywords: Fiscal Policy; Endogenous Growth Model; Technological Change (search for similar items in EconPapers)
JEL-codes: E22 O32 O41 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2001-04
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Published - published in: Economics Bulletin, 2007, 15(7), 1-8.

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Journal Article: Welfare Analysis in a Schumpeterian Growth Model with Capital (2007)
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