Essays on endogenous growth and endogenous cycle with policy implications

Abstract

This thesis is composed of three essays on endogenous growth and endogenous cycle with policy implications. The first chapter explores optimal government debt in a dynastic family model with endogenous fertility, elastic leisure, and human capital externalities. Due to the externality, fertility is higher but leisure, labor and education spending per child are lower than their social optimum. Government debt can improve welfare by reducing fertility and raising leisure and human capital investment per child. The first-best allocation can be achieved when using a lump-sum tax to service government debt along with education subsidization. When it is serviced by a labor income tax, government debt can also improve welfare, even though it may reduce labor, regardless of whether education spending is subsidized. The second chapter investigates the effects of different subsidies on growth and welfare in an endogenous cycle framework. Unlike existing studies in the R&D growth literature where the innovators are granted permanent monopoly right over the sale of their invented intermediate goods, we assume the length of patent protection is finite (one period in particular), finding some new insights. First, by considering the subsidies to R&D investment and the subsidies to newly invented intermediate goods, the original critical capital-variety ratio, which distinguishes the investment-led (policy-dormant) and innovation-led (policy-active) growth regimes, can be reduced substantially. This tends to enhance the chance for the economy to stay in the innovation-led growth regime. Second, with subsidies, we may change the asymptotic behavior of the capital-variety ratio significantly and eliminate cycles and make the economy converge to a balanced growth path. Numerically, the adoption of subsidies financed by a consumption tax may achieve a substantial welfare gain. By extending the same endogenous cycle model to consider a leisure-labor trade-off in preferences, the last chapter explores equilibrium labor variations when the economy alternates between the investment-led growth (Solow) regime and the innovation-led growth (Romer) regime. It finds that equilibrium labor is higher and output grows faster in the Solow regime without innovation than in the Romer regime with innovation along the period-2 cycles. This result is consistent with the empirical fact of pro-cyclical employment.