Long-run effects of government policy in the growth model with creative destruction

Abstract

The non-scale Schumpeterian model of Howitt (1999) does not generate socially optimal outcomes. This is mainly due to the monopoly power in intermediate sectors and the existence of R&D externalities. Because of these distortions, the decentralized growth rate deviates from its optimal level, and the decentralized final output is always lower than that of social plannera??s economy. This thesis analyses whether the government can use policy instruments to guide the decentralized economy reaching the socially optimal growth. It shows that a proper combination of policies containing capital-income tax, lump-sum tax, investment subsidy, as well as vertical and horizontal R&D subsidies could achieve this goal. It also shows that a subsidy to intermediate-good purchase could eliminate the level difference between final outputs.