Welfare and growth impacts of innovation policies in a small, open economy. An applied general equilibrium analysis

Brita Bye, Taran Fæhn and Tom-Reiel Heggedal

Discussion Papers from Statistics Norway, Research Department

Abstract: We explore how innovation incentives in a small, open economy should be designed in order to achieve the highest welfare and growth, by means of a computable general equilibrium model with R&D-driven endogenous technological change embodied in varieties of capital. We study policy alternatives targeted towards R&D, capital varieties formation, and domestic investments in capital varieties. Subsidising domestic investments, thereby excluding stimuli to world market deliveries, generates less R&D, capital formation, economic growth, and welfare, than do the other alternatives, reflecting that the domestic market for capital varieties is limited. Directing support to R&D rather than to capital formation generates stronger economic growth, a higher number of patents and capital varieties, and a higher share of R&D in total production. However, it costs in terms of lower production within each firm, where presence of sunk patent costs and mark-ups result in efficiency losses. The welfare result is, thus, slightly lower.

Keywords: Applied general equilibrium; Endogenous growth; Research and Development (search for similar items in EconPapers)
JEL-codes: C68 E62 H32 O38 O41 (search for similar items in EconPapers)
Date: 2007-07
New Economics Papers: this item is included in nep-hap, nep-ino, nep-ipr, nep-pr~, nep-mac and nep-mic
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Citations: View citations in EconPapers (6)

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Journal Article: Welfare and growth impacts of innovation policies in a small, open economy; an applied general equilibrium analysis (2009)
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