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Effects of subsidies on growth and welfare in a quality-ladder model with elastic labor

Ruiyang Hu, Yibai Yang () and Zhijie Zheng ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper develops a quality-ladder growth model with elastic labor supply and distortionary taxes to analyze the effects of different subsidy instruments: subsidies to the production of final goods, subsidies to the purchase of intermediate goods, and subsidies to research and development (R&D). The model is calibrated to the US data to compare the growth and welfare implications of these subsidies. The main results are as follows. First, a coordination of all instruments attains the social optimum. Second, as for the use of a single instrument, the R&D subsidy is less growth-enhancing and welfare-improving than the other subsidies. Finally, as for the use of a mix of any two instruments, subsidizing the production of final goods and the purchase of intermediate goods is most effective in promoting growth but least effective in raising welfare.

Keywords: Economic Growth; R&D; Quality Ladder; Subsidies (search for similar items in EconPapers)
JEL-codes: D61 E62 O31 O38 (search for similar items in EconPapers)
Date: 2019-11-04
New Economics Papers: this item is included in nep-dge, nep-gro, nep-mac and nep-tid
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