What is it about?
This article evaluates if the US should increase subsidies to R&D made by firms given the level of the other policies already implemented in the tax system, either taxes or subsidies. In particular and most importantly, it makes it maintaining the public deficit constant. The answer depends on which a budget neutral policy (e.g. increases in subsidies) has positive or negative effects on welfare.
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Why is it important?
This is important because it is the first assessment of the effect of subsidies to R&D in an endogenous growth framework together with a neutral effect in government deficits, meaning that R&D (and other) subsidies have not only a positive effect in R&D activities but also opportunity costs on the government budget, i.e. increasing R&D subsidies implies that the government may decrease subsidies to investment or education and/or increase taxes and this may also have negative effects in welfare.
Perspectives
In my view, this is yet to date the most complete model of endogenous growth in the tradition of of the semi-endogenous R&D-based increasing varieties growth models (in the line of Jones, 1995), as it incorporates not only physical and human capital (as others also do) but also several externalities affecting all the production factors as well as a complete set of policy fiscal measures. It was again an awesome opportunity to work with my co-author and friend Manuel Gómez.
Tiago N Sequeira
Universidade da Beira Interior
Read the Original
This page is a summary of: Should the US increase subsidies to R&D? Lessons from an endogenous growth theory, Oxford Economic Papers, March 2013, Oxford University Press (OUP),
DOI: 10.1093/oep/gpt007.
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