Subsidies in an R&D growth model with elastic labor

Abstract

This paper compares different subsidies in an R&D growth model with competitive suppliers of a final good and monopolistic suppliers of intermediate goods. Unlike existing studies with lump-sum taxes and fixed labor, we assume distortionary taxes and elastic labor, finding some new insights. First, subsidizing R&D investment is more effective than subsidizing final output or subsidizing the purchase of intermediate goods in terms of promoting growth. Second, in terms of raising welfare, the R&D subsidy may also be more effective than the other subsidies and all of them are dominated by their mix, but none can achieve the social optimum. © 2006 Elsevier B.V. All rights reserved.