Should the US increase subsidies to R&D? Lessons from an endogenous growth theory

Abstract

[Abstract]: In this article we devise an endogenous growth model with R&D, physical capital, and human capital with several externalities. The model is calibrated to the US economy and used to quantitatively evaluate the effect on growth and welfare of implementing different budget-neutral policies. The welfare effects of different policies are calculated by taking into account the transitional dynamics of the economy after the policy reform. Our main findings have policy implications; mainly, subsidies to research are the most welfare-increasing amongst the budget-neutral policies, and the optimal structure of subsidies entails substantially increasing the subsidy to R&D, maintaining a zero subsidy to production, and reducing the subsidy to education, so as to keep the intertemporal government budget balanced. A detailed sensitivity analysis shows the robustness of these results.