Optimal Public Policy in an Endogenous Growth Model with Monopoly

Abstract

This thesis examines optimal public policy in an R&D-based endogenous growth model with elastic labor supply and monopolistic supply of intermediate goods. The focus of this study is on R&D subsidies financed by various distortionary taxes. The balanced growth paths of both decentralized economy and social planner?s economy are computed, and the welfare effects of financing R&D subsidies with consumption taxes, labor income taxes, and capital income taxes are explored. It is shown that consumption taxes are the most efficient taxes to finance R&D subsidies, while capital income taxes are the least efficient taxes. This result is consistent with those in the existing literature on taxation in neoclassical growth models and capital-based endogenous growth models. This finding complements the studies in the literature on optimal public policy in R&D-based endogenous growth models.