Optimal policy and non-scale growth with R&D externalities

Simone Valente

MPRA Paper from University Library of Munich, Germany

Abstract: An established result of the endogenous growth literature is that laissez-faire equilibria in expanding-varieties models are suboptimal due to the rent-effect: monopolistic pricing drives the equilibrium quantity of each intermediate input below the efficient level, implying that it is optimal to subsidize �final producers. This paper shows that, if scale effects are eliminated by introducing R&D spillovers, normative prescriptions change. Since the laissez-faire economy under-invests into R&D activity, the share of resources devoted to intermediates' production increases and this reallocation effect contrasts the rent-effect. In many scenarios, including the polar case of logarithmic preferences, the reallocation effect surely dominates. The equilibrium quantity of each intermediate exceeds the optimal level and the optimal policy consists of taxing, instead of subsidizing fi�nal producers because fi�scal authorities must redirect the extra-output generated by under-investment towards R&D activity.

Keywords: Endogenous Growth; Scale Effects; R&D Externalities; Optimal Policy (search for similar items in EconPapers)
JEL-codes: O31 O41 (search for similar items in EconPapers)
Date: 2011-07-29
New Economics Papers: this item is included in nep-fdg and nep-ino
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Related works:
Working Paper: Optimal Policy and Non-Scale Growth with R&D Externalities (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:32473

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