Optimal fiscal policy in a Schumpeterian model

Abstract

This thesis investigates optimal fiscal policy in a Schumpeterian model with elastic labor supply. The key findings are as follows. R&D subsidies/taxes may be necessary for replicating the first-best outcome. The choice between R&D subsidies and R&D taxes is contingent upon the magnitudes of spillover effect, monopoly power and R&D productivity. Capital investment subsidies are also required, the magnitude of which depends positively on the degree of monopoly power in intermediate good sector. Furthermore, capital investment subsidies have to be larger than capital-income taxes. The formal analysis are also supplemented by numerical results, with a particular focus on the welfare implications of capital investment subsidies and R&D subsidies.